TAYLOR CALVIN B BANKSHARES INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934

For the fiscal year ended December 31, 2004

Commission File No. 000-50047

Calvin B. Taylor Bankshares, Inc.
(Exact name of registrant as specified in its Charter)

Maryland (State of incorporation or organization)
52-1948274 (I.R.S. Employer Identification No.)

24 North Main Street, Berlin, Maryland 21811
(Address of principal executive offices, including zip code)

Registrant's telephone number, including area code: (410) 641-1700

Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $1.00 per share

Indicate by check mark whether the registrant has (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ X ] No ____

Indicate by check mark if disclosure of delinquent filers in response to
Item 405 of Regulation S-K is not contained in this form, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ X ]

Indicate by check mark if the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Act). Yes [ X ] No ____

The aggregate market value of the Common Stock held by non-affiliates of the
registrant on December 31, 2004, was $104,361,941. This calculation is based
upon the last price known to the registrant at which its Common Stock was sold
as of the last business day of the registrant's most recently completed second
fiscal quarter. As of June 30, 2004, the last known sale price was $37.00 per
share. There is not an active trading market for the Common Stock and it is
not possible to identify precisely the market value of the Common Stock.

On February 28, 2005, 3,207,584 shares of the registrant's common stock were
issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
The Company's Proxy Statement for Annual Meeting of Shareholders to be held on
May 11, 2005, is incorporated by reference in this Form 10-K in Part III,
Item 10, Item 11, Item 12, Item 13, and Item 14.

This Report contains statements which constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933
and the Securities Exchange Act of 1934. These statements appear in a
number of places in this Report and include all statements regarding the
intent, belief or current expectations of the Company, its directors, or
its officers with respect to, among other things: (i) the Company's
financing plans; (ii) trends affecting the Company's financial condition
or results of operations; (iii) the Company's growth strategy and
operating strategy; and (iv) the declaration and payment of dividends.
Investors are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, and
that actual results may differ materially from those projected in the
forward-looking statements as a result of various factors discussed herein
and those factors discussed in detail in the Company's filings with the
Securities and Exchange Commission.

PART I

Item 1. Business

General

Calvin B. Taylor Bankshares, Inc. (Company) was incorporated as a
Maryland corporation on October 31, 1995. The Company owns all of the stock
of Calvin B. Taylor Banking Company of Berlin, Maryland (Bank). The Bank
is a commercial bank incorporated under the laws of the State of Maryland on
December 17, 1907, with a main office located in Berlin, Maryland.

The Company's holding company structure can assist the Bank in maintaining
its required capital ratios because the Company may, subject to compliance with
debt guidelines implemented by the Board of Governors of the Federal Reserve
System (Board of Governors or Federal Reserve), borrow money and contribute
the proceeds to the Bank as primary capital. The holding company structure
also permits greater flexibility in issuing stock for cash, property,or
services and in reorganization transactions. Moreover, subject to certain
regulatory limitations, a holding company can purchase shares of its own stock,
which the Bank may not do without regulatory approval. A holding company may
also engage in certain non-banking activities which the Board of Governors has
deemed to be closely related to banking and proper incidents to the business of
a bank holding company. These activities include making or servicing loans and
certain types of leases; performing certain data processing services; acting as
a fiduciary or investment or financial advisor; acting as a management
consultant for other depository institutions; providing courier, appraisal, and
consumer financial counseling services; providing tax planning and preparation
services; providing check guaranty and collection agency services; engaging in
limited real estate investment activities; underwriting, brokering, and selling
credit life and disability insurance; engaging in certain other limited
insurance activities; providing discount brokerage services; underwriting and
dealing in certain government obligations and money market instruments and
providing portfolio investment advice; acting as a futures commission merchant
with respect to certain financial instrument transactions; providing foreign
exchange advisory and transactional services; making investments in certain
corporations for projects designed primarily to promote community welfare; and
owning and operating certain healthy savings and loan associations. Although
the Company has no present intention of engaging in any of these services, if
circumstances should lead the Company's management to believe that there is a
need for these services in the Bank's marketing areas and that such activities
could be profitably conducted, the management of the Company would have the
flexibility of commencing these activities upon filing notice thereof with the
Board of Governors.

Location and Service Area

The Company, through the Bank, is engaged in a general commercial and
retail banking business serving individuals, small- to medium-sized businesses,
professional organizations, and governmental units. The Bank operates from
nine branches located throughout Worcester County, Maryland and one branch
located in Sussex County, Delaware. The Bank draws most of its customer
deposits and conducts most of its lending transactions within the communities
in which these branches are located.

Much of the Bank's service area is located along the shores of the Atlantic
Ocean and has grown as both a resort and a retirement community in recent years.
The principal components of the economy are tourism and agriculture. Berlin
has a strong component of health-care related businesses. The tourist
businesses of Ocean City, Maryland and Bethany, Delaware and the health-care
facilities in Berlin, Maryland (including Berlin Nursing Home and Atlantic
General Hospital) are among the largest employers in the counties.

Banking Services

The Bank offers a full range of deposit services including checking, NOW,
Money Market, and savings accounts, and time deposits including certificates
of deposit. The transaction accounts and time certificates are tailored to
the Bank's principal market areas at rates competitive to those offered in the
area. In addition, the Bank offers certain retirement account services, such
as Individual Retirements Accounts. All deposits are insured by the Federal
Deposit Insurance Corporation (FDIC) up to the maximum amount allowed by law
(generally, $100,000 per depositor subject to aggregation rules). The Bank
solicits these accounts from individuals, businesses, associations and
organizations, and governmental authorities.

The Bank also offers a full range of short? to medium-term commercial and
personal loans. Commercial loans include both secured and unsecured loans for
working capital (including inventory and receivables), business expansion
(including acquisition of real estate and improvements), and purchase of
equipment and machinery. Consumer loans include secured and unsecured loans
for financing automobiles, home improvements, education, and personal
investments. The Bank originates commercial and residential mortgage loans and
real estate construction and acquisition loans. These lending activities are
subject to a variety of lending limits imposed by state and federal law. The
Bank may not make any loans to any director or officer (except for commercial
loans to directors who are not officers or employees) unless the Board of
Directors of the Bank approves the loans. The Board of Directors reviews
such loans every six months.

Other bank services include cash management services, 24-hour ATM's, debit
cards, safe deposit boxes, travelers' checks, direct deposit of payroll and
social security checks, and automatic drafts for various accounts. The Bank
offers bank-by-phone and Internet banking services, including electronic bill-
payment, to both commercial and retail customers. The Bank provides discount
brokerage services through a correspondent bank.

Competition

The Company and the Bank face strong competition in all areas of opera-
tions. The competition comes from entities operating in Worcester County,
Maryland and Sussex County, Delaware and neighboring counties and includes
branches of some of the largest banks in Maryland, Delaware, and Virginia.
Its most direct competition for deposits historically has come from other
commercial banks, savings banks, savings and loan associations, and credit
unions operating in its service areas. The Bank also competes for deposits with
money market mutual funds and corporate and government securities. The Bank
competes for loans with the same banking entities, as well as mortgage banking
companies and other institutional lenders. The competition for loans varies
from time to time depending on certain factors. These factors include, among
others, the general availability of lendable funds and credit, general and local
economic conditions, current interest rate levels, conditions in the mortgage
market, and other factors which are not readily predictable.

The Bank employs traditional marketing media including local newspapers
and radio, to attract new customers. Bank officers, directors, and employees
are active in numerous community organizations and participate in community-
based events. These activities and referrals of satisfied customers result in
new business.

Employees

As of December 31, 2004, the Bank employed 93 full-time equivalent
employees. The Company's operations are conducted through the Bank.
Consequently, the Company does not have separate employees. None of the
employees of the Bank are represented by any collective bargaining unit.
The Bank considers its relations with its employees to be good.

SUPERVISION AND REGULATION

The Company and the Bank are subject to state and federal banking laws
and regulations which impose specific requirements or restrictions on, and
provide for general regulatory oversight with respect to, virtually all aspects
of operations. These laws and regulations are generally intended to protect
depositors, not shareholders. The following is a brief summary of certain
statutes, rules, and regulations affecting the Company and the Bank. To the
extent that the following summary describes statutory or regulatory provisions,
it is qualified in its entirety by reference to the particular statutory and
regulatory provisions.

Beginning with the enactment of the Financial Institutions Reform,
Recovery and Enforcement Act of 1989 (FIRREA) and following with the Federal
Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), numerous
additional regulatory requirements have been placed on the banking industry,
and additional changes have been proposed. Legislative changes and the
policies of various regulatory authorities may affect the operations of the
Company and the Bank and those effects may be material. The Company is unable
to predict the nature or the extent of the effect on its business and earnings
that fiscal or monetary policies, economic controls, or new federal or state
legislation may have in the future.

Gramm-Leach-Bliley Act

In November 1999, the Gramm-Leach-Bliley Act was signed into law. Among
other things, the Act repeals the restriction, contained in the Glass-Steagall
Act, on banks affiliating with securities firms. The Act permits bank holding
companies to engage in a statutorily provided list of financial activities,
including insurance and securities underwriting and agency activities, merchant
banking, and insurance company portfolio investment activities. The Act also
authorizes activities that are "complementary" to financial activities. The
Act is intended to grant certain powers to community banks that larger
institutions have accumulated on an ad hoc basis. The Act may have the result
of increasing competition that the Company and the Bank face from larger
institutions and other types of companies. In fact, it is not possible to
predict the full effect that the Act will have on the Company and the Bank.

The Company

The Company is a bank holding company within the meaning of the federal
Bank Holding Company Act of 1956 (BHCA). Under the BHCA, the Company is
subject to periodic examination by the Federal Reserve and is required to file
periodic reports of its operations and such additional information as the
Federal Reserve may require. The Company's and the Bank's activities are
limited to banking, managing or controlling banks, furnishing services to or
performing services for its Subsidiary, or engaging in any other activity that
the Federal Reserve determines to be so closely related to banking or managing
and controlling banks as to be a proper incident thereto.

Investments, Control, and Activities. With certain limited exceptions,
the BHCA requires a bank holding company to obtain the prior approval of the
Federal Reserve before (i) acquiring substantially all the assets of any bank,
(ii) acquiring direct or indirect ownership or control of any voting shares of
any bank if after such acquisition it would own or control more than 5% of the
voting shares of such bank (unless it already owns or controls the majority of
such shares), or (iii) merging or consolidating with another bank holding
company.

In addition, and subject to certain exceptions, the BHCA and the Change
in Bank Control Act, together with regulations thereunder, require Federal
Reserve approval (or, depending on the circumstances, no notice of disapproval)
prior to any person or company acquiring "control" of a bank holding company,
such as the Company. Control is conclusively presumed to exist if an
individual or company acquires 25% or more of any class of voting securities
of the bank holding company. Because the Company's Common Stock is registered
under the Securities Exchange Act of 1934, under Federal Reserve regulations,
control will be rebuttably presumed to exist if a person acquires at least 10%
of the outstanding shares of any class of voting securities of the Company.
The regulations provide a procedure for challenge of the rebuttable control
presumption.

Under the BHCA, the Company is generally prohibited from engaging in, or
acquiring direct or indirect control of more than 5% of the voting shares of
any company engaged in non-banking activities, unless the Federal Reserve, by
order or regulation, has found those activities to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.

Source of Strength; Cross-Guarantee. Under Federal Reserve policy, the
Company is expected to act as a source of financial strength to the Bank and
to commit resources to support the Bank in circumstances in which the Company
might not otherwise do so. Federal Reserve may require a bank holding company
to terminate an activity or relinquish control of a nonbank subsidiary if
Federal Reserve determines that such activity or control poses serious risk to
the financial soundness or stability of a subsidiary bank. Further, federal
bank regulatory authorities have discretion to require a bank holding company
to divest itself of any bank or nonbank subsidiary if the agency determines
that divestiture may aid the depository institution's financial condition. The
Bank may be required to indemnify, or cross-guarantee, the FDIC against losses
it incurs with respect to any other bank controlled by the Company, which in
effect makes the Company's equity investments in healthy bank subsidiaries
available to the FDIC to assist any failing or failed bank subsidiary of the
Company.

Securities Exchange Act of 1934

The Company's common stock is registered with the Securities and Exchange
Commission (SEC) under Section 12(g) of the Securities Exchange Act of 1934
(the Act). The Company is, therefore, subject to periodic and ad hoc
information reporting, proxy solicitation rules, restrictions on insider
trading, and other requirements of the Act.

Sarbanes-Oxley Act

The Sarbanes-Oxley Act (SOX) of 2002 imposed additional disclosure
requirements in the Company's reports filed with SEC. SOX defines new
standards of independence for insiders, provides guidance for certain Board
committees including the composition of those committees, and establishes
corporate governance requirements.

The Bank

General. The Bank operates as a state nonmember banking association
incorporated under the laws of the State of Maryland. It is subject to
examination by the FDIC and the state department of banking regulation for
each state in which it has a branch. The States and FDIC regulate or monitor
all areas of the Bank's operations, including security devices and procedures,
adequacy of capitalization and loss reserves, loans, investments, borrowings,
deposits, mergers, issuances of securities, payment of dividends, interest
rates payable on deposits, interest rates or fees chargeable on loans,
establishment of branches, corporate reorganizations, maintenance of books and
records, and adequacy of staff training to carry on safe lending and deposit
gathering practices. The FDIC requires the Bank to maintain certain capital
ratios and imposes limitations on the Bank's aggregate investment in real
estate, bank premises, and furniture and fixtures. The Bank is required by
the FDIC to prepare quarterly reports on the Bank's financial condition.

Under provisions of the FDICIA, all insured institutions must undergo
periodic on-site examination by the appropriate banking agency. The cost of
examinations of insured
depository institutions and any affiliates may be assessed by the agency
against each institution or affiliate, as it deems necessary or appropriate.
Insured institutions are required to submit annual reports to the FDIC and the
appropriate agency (and state supervisor when applicable). FDICIA also directs
the FDIC to develop with other appropriate agencies a method for insured
depository institutions to provide supplemental disclosure of the estimated
fair market value of assets and liabilities, to the extent feasible and
practicable, in any balance sheet, financial statement, report of condition,
or other report of any insured depository institution. FDICIA also requires
the federal banking regulatory agencies to prescribe, by regulation, standards
for all insured depository institutions and depository institution holding
companies relating, among other things, to: (i) internal controls, information
systems, and audit systems; (ii) loan documentation; (iii) credit underwriting;
(iv) interest rate risk exposure; and (v) asset quality.

Transactions With Affiliates and Insiders. The Bank is subject to
Section 23A of the Federal Reserve Act, which places limits on the amount of
loans or extensions of credit to, or investment in, or certain other
transactions with, affiliates and on the amount of advances to third parties
collateralized by the securities or obligations of affiliates. The aggregate
of all covered transactions is limited in amount, as to any one affiliate, to
10% of the Bank's capital and surplus and, as to all affiliates combined, to
20% of the Bank's capital and surplus. In addition, each covered transaction
must meet specific collateral requirements. The Bank is also subject to
Section 23B of the Federal Reserve Act which, among other things, prohibits an
institution from engaging in certain transactions with certain affiliates unless
the transactions are on terms substantially the same, or at least as favorable
to such institution or its subsidiaries, as those prevailing at the time for
comparable transactions with nonaffiliated companies. The Bank is subject to
certain restrictions on extensions of credit to executive officers, directors,
certain principal shareholders, and their related interests. Such extensions
of credit (i) must be made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with third parties, and (ii) must not involve more than the
normal risk of repayment or present other unfavorable features.

Community Reinvestment Act. The Community Reinvestment Act requires that
the Bank shall be evaluated by its primary federal regulator with respect to
its record in meeting the credit needs of its local community, including low
and moderate income neighborhoods, consistent with the safe and sound operation.
These factors are also considered in evaluating mergers, acquisitions, and
applications to open a branch or facility. The Bank received a satisfactory
rating in its most recent evaluation.

USA Patriot Act. In response to the terrorist attacks on September 11,
2001, Congress passed the Patriot Act. The Patriot Act requires that Banks
prepare and retain additional records designed to assist the government in an
effort to combat terrorism. The Act includes anti-money laundering and
financial transparency provisions, and guidelines for verifying customer
identification during account opening. The Act promotes cooperation between
law enforcement, financial institutions, and financial regulators in identifying
persons involved in illegal acts such as money laundering and terrorism.

Other Regulations. Interest and certain other charges collected or
contracted for by the Bank are subject to state and federal laws concerning
interest rates. The Bank's loan operations are also subject to certain federal
laws applicable to credit transactions, such as the federal Truth-In-Lending
Act governing disclosures of credit terms to consumer borrowers, the Home
Mortgage Disclosure Act of 1975 requiring financial institutions to provide
information to enable the public and public officials to determine whether a
financial institution is fulfilling its obligation to help meet the housing
needs of the community it serves, the Equal Credit Opportunity Act prohibiting
discrimination on the basis of race, creed, or other prohibited bases in
extending credit, the Fair Credit Reporting Act of 1978 governing the use and
provision of information to credit reporting agencies, the Fair Debt
Collection Act governing the manner in which consumer debts may be collected by
collection agencies, and the rules and regulations of the various federal
agencies charged with the responsibility of implementing such federal laws.
The deposit operations of the Bank are also subject to the Right to Financial
Privacy Act which imposes a duty to maintain confidentiality of customers'
financial records and prescribes procedures for complying with administrative
subpoenas of financial records, and the Electronic Funds Transfer Act as
implemented by the Federal Reserve Board's Regulation E which governs automatic
deposits to and withdrawals from deposit accounts and customers' rights and
liabilities arising from the use of automated teller machines and other
electronic banking services.

Deposit Insurance

The FDIC establishes rates for the payment of premiums by federally
insured banks and thrifts for deposit insurance. Separate insurance funds
are maintained for commercial banks (BIF) and thrifts (SAIF), with insurance
premiums from the industry used to offset losses from insurance payouts when
banks and thrifts fail. Since 1993, insured depository institutions like the
Bank have paid for deposit insurance under a risk-based premium system. With
BIF at its legally mandated reserve ratio, FDIC has set the premiums for well-
capitalized banks at a level of $.00 per $100 of insured deposits. The BIF
insurance assessment rate for the first semiannual assessment period of 2005
is proposed to remain at $.00 to $.27 per $100 in deposits. In addition to
the amount paid for deposit insurance, banks are assessed an additional amount
to service the interest on the bond obligations of the Financial Corporation
(FICO). Any increase in deposit insurance premiums for the Bank will increase
the Bank's cost of funds, and there can be no assurance that such costs can be
passed on to the Bank's customers.

Dividends

The principal source of the Company's cash revenues comes from dividends
received from the Bank. The amount of dividends that may be paid by the Bank
to the Company depends on the Bank's earnings and capital position and is
limited by federal and state laws, regulations, and policies. The Federal
Reserve has stated that bank holding companies should refrain from or limit
dividend increases or reduce or eliminate dividends under circumstances in
which the bank holding company fails to meet minimum capital requirements or
in which earnings are impaired.

The Company's ability to pay any cash dividends to its shareholders in
the future will depend primarily on the Bank's ability to pay dividends to
the Company. In order to pay dividends to the Company, the Bank must comply
with the requirements of all applicable laws and regulations. Under Maryland
law, the Bank must pay a cash dividend only from the following, after providing
for due or accrued expenses, losses, interest, and taxes: (i) its undivided
profits, or (ii) with the prior approval of the Department of Financial
Regulation, its surplus in excess of 100% of its required capital stock. Under
FDICIA, the Bank may not pay a dividend if, after paying the dividend, the Bank
would be undercapitalized. See "Capital Regulations" below. See Item 5 for a
discussion of dividends paid by the Bank in the past three years.

In addition to the availability of funds from the Bank, the future
dividend policy of the Company is subject to the discretion of the Board of
Directors and will depend upon a number of factors, including future earnings,
financial condition, cash needs, and general business conditions. The amount
of dividends that might be declared in the future presently cannot be estimated
and it cannot be known whether such dividends would continue for future periods.

Capital Regulations

The federal bank regulatory authorities have adopted risk-based capital
guidelines for banks and bank holding companies that are designed to make
regulatory capital requirements more sensitive to differences in risk profile
among banks and bank holding companies, account for off-balance sheet exposure,
and minimize disincentives for holding liquid assets. The resulting capital
ratios represent qualifying capital as a percentage of total risk-weighted
assets and off-balance sheet items. The guidelines are minimums, and the
regulators have noted that banks and bank holding companies contemplating
significant expansion programs should not allow expansion to diminish their
capital ratios and should maintain ratios well in excess of the minimums.

Current guidelines require bank holding companies and federally regulated
banks to maintain a minimum ratio of total capital to risk-based assets equal
to 8%, of which at least 4% must be Tier 1 capital. Tier 1 capital includes
common shareholders' equity before the unrealized gains and losses on
securities available for sale, qualifying perpetual preferred stock, and
minority interests in equity accounts of consolidated subsidiaries, but
excludes goodwill and most other intangibles, and excludes the allowance for
loan and lease losses. Tier 2 capital includes the excess of any preferred
stock not included in Tier 1 capital, mandatory convertible securities, hybrid
capital instruments, subordinated debt and intermediate term-preferred stock,
and general reserves for loan and lease losses up to 1.25% of risk-weighted
assets. Total capital is the sum of Tier 1 plus Tier 2 capital.

Under the guidelines, banks' and bank holding companies' assets are
given risk-weights of 0%, 20%, 50%, and 100%. In addition, certain off-
balance sheet items are given credit conversion factors to convert them to
asset equivalent amounts to which an appropriate risk-weight will apply.
These computations result in the total risk-weighted assets.

The federal bank regulatory authorities have also implemented a leverage
ratio, which is Tier 1 capital as a percentage of average total assets less
intangibles, to be used as a supplement to the risk-based guidelines. The
principal objective of the leverage ratio is to place a constraint on the
maximum degree to which a bank holding company may leverage its equity capital
base. The minimum required leverage ratio for top-rated institutions is 3%,
but most institutions are required to maintain an additional cushion of at
least 100 to 200 basis points.

FDICIA established a new capital-based regulatory scheme designed to
promote early intervention for troubled banks and requires the FDIC to choose
the least expensive resolution of bank failures. The new capital-based
regulatory framework contains five categories for compliance with regulatory
capital requirements, including "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized." To qualify as a "well capitalized" institution, a bank
must have a leverage ratio of no less than 5%, a Tier 1 risk-based ratio of no
less than 6%, and a total risk-based capital ratio of no less than 10%, and the
bank must not be under any order or directive from the appropriate regulatory
agency to meet and maintain a specific capital level. As of December 31, 2004,
the Company and the Bank were qualified as "well capitalized." For further
discussions, see "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation - Capital."

Recent Legislative Developments

Periodically, the federal and state legislatures consider bills with
respect to the regulation of financial institutions. Some of these proposals
could significantly change the regulation of banks and the financial services
industry. The Company cannot predict if such proposals will be adopted or the
affect to the Company.

Item 2. Properties

The Company has ten branch locations, all of which are owned by the
Company or the Bank. The Bank leases the land on which the East Berlin
branch is located. The locations are described as follows:

Office
Location Square Footage

Main Office, Maryland
24 North Main Street, Berlin, Maryland 21811 24,229
East Berlin Office
10524 Old Ocean City Boulevard, Berlin, Maryland 21811 1,500
20th Street Office
100 20th Street, Ocean City, Maryland 21842 3,100
Ocean Pines Office
11003 Cathell Road, Berlin, Maryland 21811 2,420
Mid-Ocean City Office
9105 Coastal Highway, Ocean City, Maryland 21842 1,984
North Ocean City Office
14200 Coastal Highway, Ocean City, Maryland 21842 2,545
West Ocean City Office
9923 Golf Course Road, Ocean City, Maryland 21842 2,496
Pocomoke Office
2140 Old Snow Hill Road, Pocomoke, Maryland 21851 2,624
Snow Hill Office
108 West Market Street, Snow Hill, Maryland 21863 3,773
Ocean View, Delaware Office
50 Atlantic Avenue, Ocean View, Delaware 19970 4,900

The Berlin office is the centralized location for the Company and the
Bank; that is to say that all proof and bookkeeping is performed there. Each
branch has a manager that also serves as its loan officer, with exception of
the East Berlin office, which does not have a loan officer. All offices
participate in normal day-to-day banking operations. The Company operates
automated teller machines in all branches except the East Berlin office, and
at one non-branch location in a local hospital.

Item 3. Legal Proceedings

There are no material pending legal proceedings to which the Company or
the Bank or any of their properties are subject.

Item 4. Submission of Matters to a Vote of Security Holders

There were no matters submitted to a vote of the shareholders of the
Company during the fourth quarter of the fiscal year for which this report is
filed.

PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities

The Company's Articles of Incorporation, as amended, authorize it to
issue up to 10,000,000 shares of common stock.

As of February 28, 2005 there were approximately 997 holders of record of
the common stock and 3,207,584 shares of Common Stock issued and outstanding.
There is no established public trading market in the stock, and there is no
likelihood that a trading market will develop in the near future. Transactions
in the common stock are infrequent and are negotiated privately between the
persons involved in those transactions.

All outstanding shares of common stock of the Company are entitled to
share equally in dividends from funds legally available, when, as, and if
declared by the Board of Directors. The Company paid dividends of $.65 per
share in 2004, $.60 per share in 2003,and $1.00 per share in 2002. Included
are special cash dividends of $.60 per share in 2002, which are not expected
to be an annual event.

The following table presents information about the Company's repurchase
of its equity securities during the calendar quarter ended on the date of this
Form 10-K.

(a) Total (b) Average (c ) Total Number of (d) Maximum Number of
Number of Price Paid Shares Purchased as Shares that may yet
shares per Share Part of a Publicly be Purchased Under
Announced Program the Program

Period
October 600 $ 36.00 600 294,958
November 1,000 $ 36.00 1,000 293,958
December 1,480 $ 36.00 1,480 292,478
Totals 3,080 $ 36.00 3,080 N/A

The Company publicly announced on August 14, 2003, that it would
repurchase up to 10% of its outstanding equity stock at that time, which
equated to a total of 324,000 common shares available for repurchase. There
was no expiration date for this program. No other stock repurchase plan or
program existed simultaneously, nor had any other plan or program expired
during the period covered by this table. Common shares repurchased under
this plan are retired.

As of January 1, 2005, this plan has been renewed, by public announcement,
making up to 10% of the Company's outstanding equity stock at that time, which
equates to a total of 320,848 common shares, available for repurchase in 2005.
Common shares repurchased under this plan are retired.

Item 6. Selected Financial Data
The following table presents selected financial data for the five years
ended December 31, 2004.

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation

BUSINESS OF THE COMPANY

Calvin B. Taylor Bankshares, Inc. (Company) is a bank holding company that
was incorporated in the State of Maryland on October 31, 1995. Calvin B. Taylor
Banking Company (Bank), which commenced operation in 1890, was incorporated
under the laws of the State of Maryland on December 17, 1907, and is a state
nonmember bank under the laws of the State of Maryland. The Bank is engaged
in a general commercial banking business, emphasizing in its marketing the
Company's local management and ownership, from its main office and branches
located in its primary service area of Worcester County, Maryland and Sussex
County, Delaware, and neighboring counties. The Bank offers a full range of
deposit services, including checking accounts, NOW, Money Market, and savings
accounts and other time deposits, including certificates of deposit. In
addition, the Bank offers certain retirement account services, such as
Individual Retirement Accounts. The Bank also offers a full range of short-
to medium-term commercial and personal loans. The Bank originates fixed
rate mortgage loans and real estate construction and acquisition loans. These
loans generally have a demand feature. Other bank services include cash
management services, safe deposit boxes, travelers' checks, direct deposit of
payroll and social security checks, debit cards, and automatic drafts for
various accounts. The Bank also offers bank-by-phone and Internet banking
services, including electronic bill payment.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion of the Company's financial condition and results
of operations should be read in conjunction with the Company's financial
statements and related notes and other statistical information included in this
report.

Overview

Consolidated income of the Company is derived primarily from operations of
the Bank. The 2004 net income was $5,613,187 compared to $5,540,214 for 2003,
and $5,753,916 for 2002. The Company had a return on average equity of 8.64%
and return on average assets of 1.42% for 2004, compared to returns on average
equity of 8.97% and 9.83%, and returns on average assets of 1.45% and 1.65%,
for 2003 and 2002, respectively.

Results of Operations

The Company's net income of $5,613,187, or $1.74 per share, for the year
ended December 31, 2004, was an increase of $72,973 or 1.32%, from the net
income of $5,540,214, or $1.71 per share, for the year ended December 31, 2003.
Factors contributing to this increase included a $50,572 increase in net
interest income and a lower effective income tax rate that results from tax-
favored revenue becoming a higher percentage of total revenue. Increases in
noninterest revenues and noninterest expenses offset each other. Noninterest
revenue increased $185,961 (11.89%) in 2004 compared to 2003, while noninterest
expense increased $186,810 (2.82%) during the same period.

The Company's net income of $5,540,214, or $1.71 per share, for the year
ended December 31, 2003, was a decrease of $213,702, or 3.71%, from the net
income of $5,753,916, or $1.78 per share, for the year ended December 31, 2002.
Noninterest income decreased by 9.62% during 2003 compared to 2002, while
noninterest expense increased by 1.87% during the same period. Included in
noninterest income for 2002 is a $267,844 gain on the sale of an unimproved
property in Ocean View, Delaware, which contributed $164,403 net of tax, to 2002
net income. Without that gain, noninterest income would have increased from
2002 to 2003 by 6.93%.

The Company's net income of $1,451,346 or $.45 per share, for the quarter
ended December 31, 2004, was an increase of $142,802, or 10.91%, from the net
income of $1,308,544 or $.40 per share, for the quarter ended December 31, 2003.
Increased net interest income was the primary reason for the increase. As the
Bank's time deposits continued to reprice downward, reflecting rate reductions
from the previous year, the Bank enjoyed a widening interest spread. At the
same time, the Bank has seen a shift in interest-bearing deposits from higher
rate time deposits to relatively lower rate NOW and Money Market accounts.

The Company's net income of $1,308,544 or $.40 per share, for the quarter
ended December 31, 2003, was a decrease of $133,285, or 9.25%, from the net
income of $1,441,829, or $.45 per share, for the quarter ended December 31,
2002. Eliminating the fourth quarter 2002 net gain of $164,403 on the Ocean
View property, net income would have increased $31,118 or 2.15%.

Net Interest Income

The primary source of income for the Company is net interest income, which
is the difference between revenue on interest-earning assets, such as investment
securities and loans, and interest incurred on interest-bearing sources of
funds, such as deposits and borrowings. The level of net interest income is
determined primarily by the average balance of interest-earning assets and
funding sources and the various rate spreads between the interest-earning assets
and the Company's funding sources. Changes in net interest income from period
to period result from increases or decreases in the volume of interest-earning
assets and interest-bearing liabilities, and increases or decreases in the
average rates earned and paid on such assets and liabilities. The volume of
interest-earning assets and interest-bearing liabilities is affected by the
ability to manage the earning-asset portfolio, which includes loans, and the
availability of particular sources of funds, such as noninterest-bearing
deposits.

The key performance measure for net interest income is the "net margin on
interest-earning assets," or net interest income divided by average interest-
earning assets. The Company's net interest margin for 2004 on a non-GAAP tax-
equivalent basis, was 3.88%, compared to 3.96% and 4.32% for 2003 and 2002,
respectively. Because most of the Bank's loans are written with a demand
feature, the income of the Bank should not change dramatically as interest
rates change. Management of the Company expects to maintain the net margin on
interest-earning assets. The net margin may decline, however, if competition
increases, loan demand decreases, or the cost of funds rises faster than the
return on loans and securities. Although such expectations are based on
management's judgment, actual results will depend on a number of factors that
cannot be predicted with certainty, and fulfillment of management's
expectations cannot be assured.

Dividends and interest on tax-exempt securities and loans are reported on a
fully taxable equivalent basis, which is a non-GAAP measure. The variance that
is both rate/volume related is reported with the rate variance.

Composition of Loan Portfolio

Because loans are expected to produce higher yields than investment
securities and other interest-earning assets (assuming that loan losses are not
excessive), the absolute volume of loans and the volume as a percentage of
total earning assets is an important determinant of net interest margin.
Average loans, net of the allowance for loan losses, were $161,481,136,
$165,194,000,and $165,293,144 during 2004, 2003, and 2002, respectively, which
constituted 44.66%, 46.90%, and 50.75% of average interest-earning assets for
the periods. The Company's loan to deposit ratio was 50.51%, 51.03%, and
53.67% at December 31, 2004, 2003, and 2002, respectively. Average loans to
average deposits were 49.90%, 52.55%, and 58.01% for 2004, 2003, and 2002,
respectively. The decrease in the loan to deposit ratio over the periods
presented is primarily attributable to continued increases in deposits with
little change in loan volume.

The Company extends loans primarily to customers located in and near
Worcester County, Maryland and Sussex County, Delaware. There are no industry
concentrations in the Company's loan portfolio. The Company does, however,
have a substantial portion of its loans in real estate and performance will be
influenced by the real estate market in the region.

The following table sets forth the composition of the Company's loan
portfolio as of December 31, 2004, 2003, and 2002, respectively.

The following table sets forth the maturity distribution, classified
according to sensitivity to changes in interest rates, for selected components
of the Company's loan portfolio as of December 31, 2004.

As of December 31, 2004, $159,791,735 or 97.62%, of the total loans
were either variable rate loans or loans written on demand.

The Company has the following commitments, lines of credit, and
letters of credit outstanding as of December 31, 2004, 2003, and 2002,
respectively.

2004 2003 2002

Construction loans $ 7,294,592 $ 10,495,735 $ 10,557,644
Other loan commitments 21,276,025 15,036,346 11,876,437
Standby letters of credit 1,535,210 2,957,508 1,726,127
Total $ 30,105,827 $ 28,489,589 $ 24,160,208

Loan commitments are agreements to lend to a customer as long as there is
no violation of any condition to the contract. Loan commitments may have
interest fixed at current rates, fixed expiration dates, and may require the
payment of a fee. Letters of credit are commitments issued to guarantee the
performance of a customer to a third party. Loan commitments and letters of
credit are made on the same terms, including collateral, as outstanding loans.
The Company's exposure to credit loss in the event of nonperformance by the
borrower is represented by the contract amount of the commitment.

Loan Quality

The allowance for loan losses represents an allowance for probable losses
in the loan portfolio. The adequacy of the allowance for loan losses is
evaluated periodically based on a review of all significant loans, with a
particular emphasis on non-accruing, past due, and other loans that management
believes require attention. The determination of the allowance rests upon
management's judgment about factors affecting loan quality and assumptions
about the economy. Management considers the year-end allowance appropriate
and adequate to cover probable losses in the loan portfolio; however,
management's judgment is based upon a number of assumptions about future
events, which are believed to be reasonable, but which may or may not prove
valid. Thus, there can be no assurance that charge-offs in future periods
will not exceed the allowance for loan losses or that additional increases in
the loan loss allowance will not be required. The Company has a history of
low loan charge-offs.

For significant problem loans, management's review consists of evaluation
of the financial strengths of the borrowers and guarantors, the related
collateral, and the effects of economic conditions. The overall evaluation
of the adequacy of the total allowance for loan losses is based on an analysis
of historical loan loss ratios, loan charge-offs, delinquency trends, and
previous collection experience, along with an assessment of the effects of
external economic conditions. It is the Company's policy to evaluate loan
portfolio risk for the purpose of establishing an adequate allowance. The
allowance may be increased for reserves for specific loans identified as
substandard during management's loan review. Generally, the Company will not
require a negative provision to reduce the allowance as a result of either
net recoveries or a decrease in loans.

The provision for loan losses is a charge to earnings in the current
period to replenish the allowance and maintain it at a level management has
determined to be adequate. As of December 31, 2004, 2003, and 2002, the
allowance for loan losses was 1.33% of outstanding loans.

No provision for loan losses was made in 2004 or 2003 due to low levels
of delinquencies. The provision for loan losses was $25,000 in 2002.

Allocation of Allowance for Loan Losses
2004 2003 2002

Commercial $ 220,460 10.12% $ 163,059 7.46% $ 139,005 6.37%
Real estate, including
construction 838,490 38.50 868,828 39.72 864,111 39.62
Consumer 78,948 3.63 81,845 3.74 112,875 5.17
General 1,040,028 47.75 1,073,545 49.08 1,065,144 48.84
Total $2,177,926 100.00% $2,187,277 100.00% $2,181,135 100.00%

Allowance for Loan Losses
2004 2003 2002

Balance at beginning of year $2,187,277 $2,181,135 $2,195,922
Loan losses:
Commercial - _ 6,816
Mortgages - - -
Consumer 13,874 3,423 41,954
Total loan losses 13,874 3,423 48,770
Recoveries on loans previously
charged off:
Commercial 2,577 533 1,000
Consumer 1,946 9,032 7,983
Total loan recoveries 4,523 9,565 8,983

Net loan losses 9,351 (6,142) 39,787
Provision for loan losses charged
to expense - - 25,000
Balance at end of year $2,177,926 $2,187,277 $2,181,135

Allowance for loan losses to loans
outstanding at end of year 1.33% 1.33% 1.33%

Net charge-offs to average loans 0.00% 0.00% 0.02%

As a result of management's ongoing review of the loan portfolio, loans
are classified as nonaccrual when it is not reasonable to expect collection of
interest under the original terms. These loans are classified as nonaccrual
even though the presence of collateral or the borrower's financial strength may
be sufficient to provide for ultimate repayment. Interest on nonaccrual loans
is recognized only when received. A delinquent loan is generally placed in
nonaccrual status when it becomes 90 days or more past due. When a loan is
placed in nonaccrual status, all interest that has been accrued on the loan
but remains unpaid is reversed and deducted from earnings as a reduction of
reported interest income. No additional interest is accrued on the loan
balance until the collection of both principal and interest becomes reasonably
certain. The Company had no nonperforming loans at December 31, 2004 and 2003.
The Company had one loan with a balance of $2,222 on which the accrual of
interest had been discontinued as of December 31, 2002.

When real estate acquired by foreclosure and held for sale is included
with nonperforming loans, the result comprises nonperforming assets. There
were no nonperforming assets at December 31, 2004, 2003, or 2002. Loans are
classified as impaired when the collection of contractual obligations,
including principal and interest, is doubtful. Management has identified no
significant impaired loans as of December 31, 2004, 2003, or 2002.

Liquidity and Interest Rate Sensitivity

The primary objective of asset/liability management is to ensure the
steady growth of the Company's primary source of earnings, net interest income.
Net interest income can fluctuate with significant interest rate movements.
To lessen the impact of these margin swings, the balance sheet should be
structured so that repricing opportunities exist for both assets and
liabilities in roughly equivalent amounts at approximately the same time
intervals. Imbalances in these repricing opportunities at any point in time
constitute interest rate sensitivity.

Liquidity represents the ability to provide steady sources of funds for
loan commitments and investment activities, as well as to provide sufficient
funds to cover deposit withdrawals and payment of debt and operating
obligations. These funds can be obtained by converting assets to cash or by
attracting new deposits. Average liquid assets (cash and amounts due from
banks, interest-bearing deposits in other banks, federal funds sold, and
investment securities) were 67.94% of average deposits for 2004, compared to
65.57% and 61.71% for 2003 and 2002, respectively.

As of December 31, 2004, $72,905,414, or 45.94% of the Company's investment
debt securities mature in one year or less. Funds invested in federal funds
sold provide liquidity so the Bank does not need a large portfolio of securities
classified as "available-for-sale." Other sources of liquidity include letters
of credit, overnight federal funds, and reverse repurchase agreements available
from correspondent banks. The total lines and letters of credit available from
correspondent banks were $19,000,000 as of December 31, 2004, 2003, and 2002.

Interest rate sensitivity refers to the responsiveness of interest-bearing
assets and liabilities to changes in market interest rates. The rate-sensitive
position, or gap, is the difference in the volume of rate-sensitive assets and
liabilities at a given time interval. The general objective of gap management
is to actively manage rate-sensitive assets and liabilities to reduce the impact
of interest rate fluctuations on the net interest margin. Management generally
attempts to maintain a balance between rate-sensitive assets and liabilities as
the exposure period is lengthened to minimize the overall interest rate risk to
the Company.

Interest rate sensitivity may be controlled on either side of the balance
sheet. On the asset side, management exercises some control over maturities.
Also, loans are written to provide repricing opportunities on fixed rate notes.
The Company's investment portfolio, including federal funds sold, provides the
most flexible and fastest control over rate sensitivity since it can generally
be restructured more quickly than the loan portfolio.

On the liability side, deposit products are structured to offer incentives
to attain the maturity distribution desired. Competitive factors sometimes
make control over deposits more difficult and, therefore, less effective as an
interest rate sensitivity management tool.

The asset mix of the balance sheet is continually evaluated in terms of
several variables: yield, credit quality, appropriate funding sources, and
liquidity. Management of the liability mix of the balance sheet focuses on
expanding the various funding sources.

As of December 31, 2004, the Company was asset-sensitive for all time
horizons. For asset-sensitive institutions, if interest rates should decrease,
the net interest margins should decline. Conversely, if interest rates should
increase, the net interest margins should increase. Since all interest rates
and yields do not adjust at the same velocity, the gap is only a general
indicator of rate sensitivity.

Interest Sensitivity Analysis
December 31, 2004

After three
Within but within After one
three twelve but within After
months months five years five years Total

Assets
Earning assets
Federal funds sold $32,692,233 $ - $ - $ - $ 32,692,233
Interest-bearing
deposits 228,724 1,286,085 646,687 - 2,161,496
Investment debt
securities 22,135,369 50,770,045 83,225,065 2,554,687 158,685,166
Loans 159,854,554 908,531 2,869,009 55,989 163,688,083
Total earning assets $214,910,880 $52,964,661 $86,740,761 2,610,676 $357,226,978

Liabilities
Interest-bearing deposits
NOW $ 68,892,268 $ - $ - $ - $ 68,892,268
Money market 49,362,532 - - - 49,362,532
Savings 53,667,020 - - - 53,667,020
Certificates
$100,000 and over 3,756,538 10,174,388 4,693,331 - 18,624,257
Certificates
under $100,000 18,811,095 23,881,176 7,991,598 - 50,683,869
Securities sold under
agreements
to repurchase 5,933,466 - - - 5,933,466
Note payable 4,911 15,181 93,550 48,519 162,161
Total interest-bearing
liabilities $200,427,830 $34,070,745 $12,778,479 $ 48,519 $247,325,573

Period gap $ 14,483,050 $18,893,916 $73,962,282 $ 2,562,157$109,901,405
Cumulative gap $ 14,483,050 $33,376,966 $107,339,248 $109,901,405

Ratio of cumulative gap
to total earning assets 4.05% 9.34% 30.05% 30.77%

Investment Securities Maturity Distribution and Yields

December 31, 2004 December 31, 2003 December 31, 2002
Amount Yield Amount Yield Amount Yield

US Treasury
One year or less $ 58,255,488 1.71% $ 68,496,088 0.97% $ 50,003,569 2.87%
Over one through
five years 58,361,766 2.57% 51,965,421 1.74% 40,065,506 2.58%
Over ten years 2,554,687 7.28% 2,559,062 7.28% 2,603,120 7.28%
Total U.S. Treasury
securities 119,171,941 2.25% 123,020,571 1.43% 92,672,195 2.87%

U.S. Government Agencies
One year or less 3,250,000 2.20% 2,000,810 4.65% 1,000,000 4.49%
Over one through
five years 16,741,938 2.61% 15,000,000 2.31% 18,902,908 3.30%
Total U. S. Government
Agencies 19,991,938 2.55% 17,000,810 2.59% 19,902,908 3.35%

State, county, and municipal
One year or less 11,399,926 1.34% 6,395,697 1.72% 4,009,906 2.45%
Over one through
five years 8,121,361 1.60% 9,830,041 1.35% 4,203,610 2.34%
Total state, county,
and municipal 19,521,287 1.45% 16,225,738 1.49% 8,213,516 2.39%

Total debt securities $158,685,166 2.19% $156,247,119 1.56% $120,788,619 2.92%

Debt securities
One year or less $ 72,905,414 1.67% $ 76,892,595 1.13% $ 55,013,475 2.87%
Over one through
five years 83,225,065 2.48% 76,795,462 1.80% 63,172,024 2.78%
Over ten years 2,554,687 7.28% 2,559,062 7.28% 2,603,120 7.28%
Total debt securities 158,685,166 2.19% 156,247,119 1.56% 120,788,619 2.92%

Equity securities 3,265,566 2.72% 2,685,158 2.70% 1,783,680 2.51%

Total securities $161,950,732 2.20% $158,932,277 1.58% $122,572,299 2.91%

Deposits and Other Interest-Bearing Liabilities

Average interest-bearing liabilities increased $2,507,550, or 1.03%, to
$245,279,167 in 2004, from $242,771,617 in 2003. Average interest-bearing
deposits increased $1,640,081, or .69%, to $240,087,443 in 2004 from
$238,447,362 in 2003, while average noninterest-bearing demand deposits
increased $7,600,593, or 10.01% to $83,499,032 in 2004 from $75,898,439 in
2003. At December 31, 2004, total deposits were $319,772,358, compared to
$317,946,053 at December 31, 2003, an increase of .57%. These rates of increase
have slowed significantly from the rates at which deposits have grown since
mid-2001. Management attributes the growth of deposits in recent years to
investors' discomfort with a depressed and volatile stock market, and a
resultant flight to the safety of insured deposits.

Average interest-bearing liabilities increased $17,588,168, or 7.81%, to
$242,771,617 in 2003, from $225,183,449 in 2002. Average interest-bearing
deposits increased $18,425,292, or 8.37%, to $238,447,362 in 2003, from
$220,022,070 in 2002, while average noninterest-bearing demand deposits
increased $10,982,926, or 16.92% to $75,898,439 in 2003, from $64,915,513 in
2002. At December 31, 2003, total deposits were $317,946,053, compared to
$301,495,466 at December 31, 2002, an increase of 5.46%.

The following table sets forth the deposits of the Company by category as
of December 31, 2004, 2003, and 2002, respectively.

December 31,
2004 2003 2002
Percent of Percent of Percent of
Amount deposits Amount deposits Amount deposits

Demand deposits $ 78,542,414 24.56% $ 75,601,460 23.78% $ 73,289,541 24.31%
NOW accounts 68,892,268 21.55% 63,400,879 19.94% 57,009,892 18.91%
Money market 49,362,532 15.44% 50,168,501 15.78% 46,942,638 15.57%
Savings accounts 53,667,020 16.78% 51,495,252 16.20% 45,514,226 15.10%
Time deposits less
than $100,000 50,683,867 15.85% 57,242,198 18.00% 62,897,083 20.86%
Time deposits of
$100,000 or more 18,624,257 5.82% 20,037,763 6.30% 15,842,086 5.25%
Total deposits $319,772,358 100.00% $317,946,053 100.00% $301,495,466 100.00%

Core deposits, which exclude certificates of deposit of $100,000 or more,
provide a relatively stable funding source for the Company's loan portfolio
and other earning assets. The Company's core deposits increased $3,239,811,
$12,254,910 and $32,246,116 during 2004, 2003, and 2002, respectively.
Management believes that this increase is largely attributable to a migration
of funds from the stock market into insured deposits. Deposits, and
particularly core deposits, have been the Company's primary source of funding
and have enabled the Company to meet both its short-term and long-term
liquidity needs. Management anticipates that such deposits will continue to
be the Company's primary source of funding in the future.

The maturity distribution of the Company's time deposits over $100,000
at December 31, 2004, is shown in the following table.

Maturities of Certificates of Deposit
and Other Time Deposits of $100,000 or More

After six
After three through
Within three through twelve After twelve
months six months months months Total

Certificates of deposit
of $100,000 or more $ 3,756,538 $ 5,007,957 $ 5,166,431 $ 4,693,331 $18,624,257

Large certificate of deposit customers tend to be extremely sensitive to
interest rate levels, making these deposits less reliable sources of funding for
liquidity planning purposes than core deposits. Some financial institutions
partially fund their balance sheets using large certificates of deposit obtained
through brokers. These brokered deposits are generally expensive and are
unreliable as long-term funding sources. Accordingly, the Company does not
accept brokered deposits.

Noninterest Revenue

Noninterest revenue for 2004 increased $185,961, or 11.89% from the
previous year. Included is a $160,771 increase in cash surrender value of bank
owned life insurance policies with a face value of $4,000,000, which were
purchased by the Bank in August 2003. A second significant increase occurred
in ATM and debit card revenues, which are up $46,742 (16.94%) from 2003 due to
increased usage.

Noninterest revenue for 2003 decreased $166,470, or 9.62% from the
previous year. This includes a decrease of $267,844 related to a 2002 gain
on the sale of property in Ocean View, Delaware. Service charges on deposit
accounts increased $35,004 primarily due to increased deposit balances.
Miscellaneous noninterest revenue increased $43,151, which includes a $54,035
increase in cash surrender value of bank owned life insurance policies.

The following table presents the principal components of noninterest
revenue for the years ended December 31, 2004, 2003, and 2002, respectively.

Noninterest Income
2004 2003 2002

Service charges on deposit accounts $ 1,050,504 $ 1,208,306 $ 993,302
ATM and debit card revenue 322,716 275,974 252,755
Miscellaneous revenue 376,577 259,556 216,405
Gain on sale of real estate - - 267,844
Total noninterest revenue $ 1,749,797 $ 1,563,836 $ 1,730,306

Noninterest revenue as a percentage
of average total assets 0.44% 0.41% 0.50%

Noninterest Expense

Noninterest expense increased $186,810, or 2.82%, from 2003 to 2004.
Increased personnel costs of $75,864 include a $50,132 increase in the cost
of group insurance. Occupancy expense increased due to increased depreciation
and real property taxes related to the Bank's Berlin office expansion completed
late in 2003. Cost related to ATM and debit cards rose $30,999 due to
increased usage. The revenues net of expenses related to ATM and debit card
usage, increased $15,743 from 2003 to 2004.

Noninterest expense increased $121,481, or 1.87%, from 2002 to 2003.
Increased personnel costs of $204,573 were due to annual raises, increased
401(k) expense, and increased cost of group insurance. Occupancy expense
increased due to increased depreciation related to recent building construction
and renovation, as well as increased maintenance costs incurred to improve and
maintain the grounds surrounding branches. Furniture and equipment expense
decreased $36,346 mainly due to decreases in service contract costs, and
improved classification of certain maintenance expenses. Of the $127,364
decrease in other operating expense, approximately $62,000 was directly
attributable to the Ocean View branch location, which previously operated as
Calvin B. Taylor Bank of Delaware, and its merger into the Calvin B. Taylor
Bank of Berlin, Maryland.

The following table presents the principal components of noninterest
expense for the years ended December 31, 2004, 2003, and 2002, respectively.

Noninterest Expense
2004 2003 2002

Compensation and related expenses $ 3,903,278 $ 3,827,414 $ 3,622,841
Occupancy expense 593,475 536,269 455,651
Furniture and equipment expense 551,721 542,433 578,779
Advertising 145,583 152,358 154,382
ATM and debit card 232,353 201,354 194,536
Business and product development 70,720 66,480 64,448
Computer software amortization 117,191 91,736 115,453
Computer software maintenance 82,514 97,570 91,141
Courier service 103,922 93,457 96,120
Deposit insurance 45,403 46,975 47,800
Director fees 89,375 84,240 80,600
Dues, donations, and subscriptions 81,328 80,842 81,171
Freight 60,829 67,517 62,294
Liability insurance 41,556 47,160 60,042
Postage 169,569 168,083 181,567
Professional fees 22,745 37,551 72,399
Stationery and supplies 135,269 125,593 158,965
Telephone 123,012 117,602 130,172
Miscellaneous 238,628 237,027 251,819
Total noninterest expense $ 6,808,471 $ 6,621,661 $ 6,500,180

Noninterest expense as a percentage
of average total assets 1.73% 1.74% 1.86%

Capital

Under the capital guidelines of the Federal Reserve Board and the FDIC,
the Company and the Bank are currently required to maintain a minimum risk-
based total capital ratio of 8%, with at least 4% being Tier 1 capital. Tier 1
capital consists of common shareholders' equity, qualifying perpetual
preferred stock, and minority interests in equity accounts of consolidated
subsidiaries, less certain intangibles. In addition, the Company and the Bank
must maintain a minimum Tier 1 leverage ratio (Tier 1 capital to total assets)
of at least 4%, but this minimum ratio is increased by 100 to 200 basis points
for other than the highest-rated institutions.

At December 31, 2004, the Company and the Bank exceeded the minimum
regulatory capital ratios, as set forth in the following table.

Analysis of Capital

Analysis of Capital
Required Consolidated Maryland
Minimums Company Bank

2004
Total risk-based capital ratio 8.0% 43.3% 41.3%
Tier I risk-based capital ratio 4.0% 41.7% 40.1%
Tier I leverage ratio 4.0% 16.0% 15.3%

2003
Total risk-based capital ratio 8.0% 39.1% 37.1%
Tier I risk-based capital ratio 4.0% 37.6% 35.9%
Tier I leverage ratio 4.0% 16.0% 14.9%

2002
Total risk-based capital ratio 8.0% 40.7% 38.9%
Tier I risk-based capital ratio 4.0% 39.4% 37.7%
Tier I leverage ratio 4.0% 15.9% 15.1%

Website Access to SEC Reports

The Bank maintains an Internet website at www.taylorbank.com. The
Company's periodic SEC reports, including annual reports on Form 10-K, quarterly
reports on Form 10-Q, and current reports on Form 8-K, are accessible through
this website. Access to these filings is free of charge. The reports are
available as soon as practicable after they are filed electronically with the
SEC.

Accounting Rule Changes

The following recent accounting pronouncements would apply to the Company
if the Company or the Bank entered into an applicable activity.

FASB Statement No. 151, Inventory Costs - an Amendment of ARB No. 43,
Chapter 4, is a result of a broader effort by the FASB working with the
International Accounting Standards Board to improve comparability of cross-
border financial reporting.

FASB Statement No. 152, Accounting for Real Estate Time-Sharing
Transactions, amends FASB Statement No. 66 Accounting for Sales of Real Estate
to reference the financial accounting and reporting guidance for real estate
time-sharing transactions that is provided in AICPA Statement of Position 04-2,
Accounting for Real Estate Time Sharing Transactions. This Statement also
amends FASB Statement No. 67, Accounting for Costs and Initial Rental Operations
of Real Estate Projects, to state that the guidance for (a) incidental
operations and (b) costs incurred to sell real estate projects does not apply
to real estate time-sharing transactions.

FASB Statement No. 153, Exchanges of Nonmonetary Assets an Amendment of AP
Opinion No. 29, eliminates the exception to fair value for exchanges of similar
productive assets that was provided in APB Opinion No. 29.

FASB Statement No. 123, Accounting for Stock-Based Compensation (Revised
2004) Share Based Payment, establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. The Statement eliminates the alternative to use the Accounting
Principles Board Opinion 25's intrinsic value method of accounting that was
provided in Statement 123 as originally issued. Under Opinion 25, issuing
stock options to employees generally result in recognition of no compensation
costs. This Statement requires entities to recognize the cost of employee
services received in exchange for awards of equity instruments based on the
grant-date fair value of those awards. In addition, this Statement amends
FASB Statement No. 95, Statement of Cash Flows to require that excess tax
benefits be reported as a financing cash inflow rather than as a reduction
of taxes paid. This Statement is effective as of the first interim or annual
reporting period that begins after June 15, 2005.

AICPA Statement of Position No. 03-3, Accounting for Certain Loans or
Debt Securities Acquired in a Transfer, prohibits the carrying over of
valuation allowances in loans and securities acquired in a transfer. At
transfer, the assets are to be recorded at the total cash flows expected to be
collected. The SOP is effective for loans acquired in fiscal years beginning
after December 15, 2004.

The accounting policies adopted by management are consistent with
accounting principles generally accepted in the United States of America and
are consistent with those followed by peer Banks.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Impact of Inflation

Unlike most industrial companies, the assets and liabilities of financial
institutions such as the Company and the Bank are primarily monetary in nature.
Therefore, interest rates have a more significant effect on the Company's
performance than do the effects of changes in the general rate of inflation and
change in prices. In addition, interest rates do not necessarily move in the
same direction or in the same magnitude as the prices of goods and services. As
discussed previously, management seeks to manage the relationships between
interest sensitive assets and liabilities in order to protect against wide
interest rate fluctuations, including those resulting from inflation. See
"Liquidity and Interest Rate Sensitivity" above.

Item 8. Financial Statements and Supplementary Data

In response to this Item, the information included on pages 1 through 21
of the Company's Annual Report to Shareholders for the year ended December 31,
2004, is incorporated herein by reference.

PART III

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures

There have been no changes in or disagreements with accountants on
accounting or financial disclosure during the fiscal year covered by this
report.

Item 9A. Controls and Procedures

Evaluation of disclosure controls and procedures
Within the ninety days prior to the date of this report, the Company's
management performed an evaluation of the effectiveness of the design and
operation of the Company's disclosure controls and procedures and its internal
controls and procedures for financial reporting. Disclosure Controls are
procedures that are designed to ensure that information required to be disclosed
in the Company's publicly filed reports is reported in a timely manner. As
part of these controls, Management reviews information gathered through systems
developed for that purpose to determine the nature of required disclosure.

Internal controls are procedures designed to provide management with
reasonable assurance that assets are safeguarded, and that transactions are
properly authorized, executed, and recorded to permit the preparation of
financial statements in accordance with generally accepted accounting
principles. Because of inherent limitations in any internal controls, errors
or irregularities may occur and not be detected. The projection of an
evaluation of controls to future periods is subject to the risk that procedures
may become inadequate due to changes in conditions including the degree of
compliance with procedures.

The Chief Executive Officer and the Treasurer of the Company have
concluded, based on the evaluation of disclosure controls and internal controls
that the financial information and disclosures included in periodic SEC filings
and the Company's financial statements are fairly presented in conformity with
generally accepted accounting principles.

Internal Control Over Financial Reporting
Management Report on Internal Control over Financial Reporting
Calvin B. Taylor Bankshares, Inc. maintains a system of internal control
over financial reporting, which is designed to provide reasonable assurance to
the Company's management and board of directors regarding the preparation of
reliable published financial statements. The system includes an organizational
structure and division of responsibility, established policies and procedures
including a code of conduct to foster a strong ethical climate, and the careful
selection, training, and development of our staff. The system contains self-
monitoring mechanisms, and an internal auditor monitors the operation of the
internal control system and reports findings and recommendations to management
and the board of directors. Corrective actions are taken to address control
deficiencies and other opportunities for improving the system as they are
identified. The board, operating through its audit committee, which is composed
entirely of directors who are not officers or employees of the Company, provides
oversight to the financial reporting process.
There are inherent limitations in the effectiveness of any system of internal
controls, including the possibility of human error and the circumvention or
overriding of controls. Accordingly, even an effective internal control system
can provide only reasonable assurance with respect to financial statement
preparation. Furthermore, the effectiveness of an internal control system may
vary over time and with circumstances.
The Company assessed its internal control system as of December 31, 2004
in relation to criteria for effective internal control over financial reporting
as described in "Internal Control - Integrated Framework," issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on its
assessment, the Company believes that, as of December 31, 2004, its system of
internal control over financial reporting met those criteria.

Calvin B. Taylor Bankshares, Inc.

Date: March 15, 2005 By: /s/ Reese F. Cropper, Jr.
Reese F. Cropper, Jr.
Chairman & Chief Executive Officer
(Principal Executive Officer)

Date: March 15, 2005 By: /s/ Jennifer G. Hawkins
Jennifer G. Hawkins
Treasurer
(Principal Financial Officer)

Attestation Report of the Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders
Calvin B. Taylor Bankshares, Inc. and Subsidiary
Berlin, Maryland

We have audited management's assessment, included in the accompanying
Management Report on Internal Control Over Financial Reporting, that Calvin B.
Taylor Bankshares, Inc. and Subsidiary maintained effective internal control
over financial reporting as of December 31, 2004, based on criteria established
in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Company's internal
control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, evaluating
management's assessment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides
a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control
over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.

In our opinion, management's assessment that Calvin B. Taylor Bankshares,
Inc. and Subsidiary maintained effective internal control over financial
reporting as of December 31, 2004, is fairly stated, in all material respects,
based on criteria established in Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Also, in our opinion, Calvin B. Taylor Bankshares, Inc. and Subsidiary
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2004, based on criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).

We have audited, in accordance with the standards of the Public Company
Accounting Oversight Board in the United States of America, the balance sheets
and the related statements of income, changes in stockholders' equity and cash
flows of Calvin B. Taylor Bankshares, Inc. and Subsidiary, and our report dated
February 2, 2005, expressed an unqualified opinion.

/s/ Rowles & Company, LLP

Baltimore, Maryland
February 2, 2005

Changes in Internal Controls
There were no significant changes in the company's internal controls or in
other factors that could significantly affect internal controls, including
corrective actions with regard to significant deficiencies and material
weaknesses.

Audit Committee and Financial Expert
The Board of Directors has adopted a written Audit Policy, which serves as
a charter for the Audit Committee. The Audit Committee is comprised of seven
independent directors, including Chairman James R. Bergey, Jr. who serves as
the financial expert.

Item 10. Directors and Executive Officers of the Registrant

In response to this item, the information included on page 4 of the
Company's Proxy Statement for Annual Meeting of Shareholders To Be Held on
May 11, 2005, is incorporated herein by reference.

Item 11. Executive Compensation

In response to this item, the information included on page 4 of the
Company's Proxy Statement for Annual Meeting of Shareholders To Be Held on
May 11, 2005, is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

In response to this item, the information included on page 5 of the
Company's Proxy Statement for Annual Meeting of Shareholders To Be Held on
May 11, 2005, is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions

In response to this item, the information included on page 4 of the
Company's Proxy Statement for Annual Meeting of Shareholders To Be Held on
May 11, 2005, is incorporated herein by reference.

Item 14. Principal Accounting Fees and Services

In response to this item, the information included on page 6 of the
Company's Proxy Statement for Annual Meeting of Shareholders To Be Held on
May 11, 2005, is incorporated herein by reference.

PART IV

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a) Exhibits
3.1 Articles of Incorporation of the Company, incorporated by
reference to Exhibit 3.1 of Registration Statement Form S-4, File
No. 33-99762.
3.2 Bylaws of the Company, incorporated by reference to Exhibit 3.2 of
Registration Statement Form S-4, File No. 33-99762.
13 Annual Report to Shareholders for the year ended December 31, 2004.

(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of the
year ended December 31, 2004.

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.

CALVIN B. TAYLOR BANKSHARES, INC.
(Registrant)

Date: March 15, 2005 By: /s/ Reese F. Cropper, Jr.
Reese F. Cropper, Jr.
Chief Executive Officer
Chairman of the Board of Directors

Date: March 15, 2005 By: /s/ Jennifer G. Hawkins
Jennifer G. Hawkins
Treasurer

Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.

Date: March 15, 2005 By: /s/ James R. Bergey, Jr.
James R. Bergey, Jr., Director

Date: March 15, 2005 By: /s/ George H. Bunting, Jr.
George H. Bunting, Jr., Director

Date: March 15, 2005 By: /s/ John H. Burbage, Jr.
John H. Burbage, Jr., Director

Date: March 15, 2005 By: /s/ Reese F. Cropper, Jr.
Reese F. Cropper, Jr.
Chief Executive Officer
Chairman of the Board of Directors

Date: March 15, 2005 By: /s/ Reese F. Cropper, III
Reese F. Cropper, III, Director

Date: March 15, 2005 By: /s/ Hale Harrison
Hale Harrison, Director

Date: March 15, 2005 By: /s/ Gerald T. Mason
Gerald T. Mason, Director

Date: March 15, 2005 By: /s/ William H. Mitchell
William H. Mitchell,
Vice President and Director

Date: March 15, 2005 By: /s/ Joseph E. Moore
Joseph E. Moore, Director

Date: March 15, 2005 By: /s/ Michael L. Quillin
Michael L. Quillin, Sr., Director

Date: March 15, 2005 By: /s/ D. Bruce Rogers
D. Bruce Rogers, Director

Date: March 15, 2005 By: /s/ Raymond M. Thompson
Raymond M. Thompson,
President and Director

Certification of Principal Executive Officer and Principal Financial Officer
Pursuant to 18 U.S.C. 1350
(Section 906 of the Sarbanes-Oxley Act of 2002)

We, the undersigned, certify that to the best of our knowledge, based upon
a review of the Annual Report on Form 10-K for the period ended December
31, 2003 of the Registrant (the "Report"):

(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Registrant.

Calvin B. Taylor Bankshares, Inc.

Date: March 15, 2005 By: /s/ Reese F. Cropper, Jr.
Reese F. Cropper, Jr.
Chairman & Chief Executive Officer
(Principal Executive Officer)

Date: March 15, 2005 By: /s/ Jennifer G. Hawkins
Jennifer G. Hawkins
Treasurer
(Principal Financial Officer)

Certification of Principal Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Reese F. Cropper, Jr., certify that:

1. I have reviewed this annual report on Form 10-K of Calvin B. Taylor
Bankshares, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
quarterly period in which this annual report is being
prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of the annual report (the "Evaluation Date");
and
a. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of the registrant's board of directors (or
persons performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
the annual report whether or not there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.

Calvin B. Taylor Bankshares, Inc.

Date: March 15, 2005 By: /s/ Reese F. Cropper, Jr.
Reese F. Cropper, Jr.
Chairman & Chief Executive Officer
(Principal Executive Officer)

Certification of Principal Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Jennifer G. Hawkins, certify that:

1. I have reviewed this annual report on Form 10-K of Calvin B.
Taylor Bankshares, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
quarterly period in which this annual report is being
prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of the annual report (the "Evaluation Date");
and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of the registrant's board of directors (or
persons performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
the annual report whether or not there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.

Calvin B. Taylor Bankshares, Inc.

Date: March 15, 2005 By: /s/ Jennifer G. Hawkins
Jennifer G. Hawkins
Treasurer
(Principal Financial Officer)

EXHIBIT 13

ANNUAL REPORT TO SHAREHOLDERS
FOR THE YEAR ENDED DECEMBER 31, 2004

Calvin B. Taylor Bankshares, Inc.
and Subsidiary

Financial Statements

December 31, 2004

Calvin B. Taylor Bankshares, Inc.
and Subsidiary

Table of Contents

Page

Report of Independent Registered Public Accounting Firm 1

Consolidated Financial Statements

Consolidated Balance Sheets 2

Consolidated Statements of Income 3

Consolidated Statements of Changes in Stockholders' Equity 4

Consolidated Statements of Cash Flows 5-6

Notes to Consolidated Financial Statements 7-21

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Calvin B. Taylor Bankshares, Inc. and Subsidiary
Berlin, Maryland

We have audited the accompanying consolidated balance sheets of
Calvin B. Taylor Bankshares, Inc. and Subsidiary as of December 31, 2004,
2003, and 2002, and the related consolidated statements of income,
changes in stockholders' equity, and cash flows for each of the three years
then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.

We conducted our audits in accordance with standards of the Public
Company Accounting Oversight Board in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Calvin B. Taylor Bankshares, Inc. and Subsidiary as of December 31, 2004,
2003, and 2002, and the results of its operations and its cash flows
for each of the three years then ended in conformity with accounting principles
generally accepted in the United States of America.

We have also audited, in accordance with standards of the Public Company
Accounting Oversight Board in the United States of America, the effectiveness
of the Company's internal control over financial reporting as of December 31,
2004, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated February 2, 2005, expressed an unqualified opinion thereon.

/s/ Rowles & Company, LLP

Baltimore, Maryland
February 2, 2005

Calvin B. Taylor Bankshares, Inc.
and Subsidiary
Consolidated Balance Sheets

December 31,
2004 2003 2002
Assets

Cash and due from banks $ 21,901,546 $ 20,482,866 $ 21,051,412
Federal funds sold 32,692,233 29,525,781 54,821,617
Interest-bearing deposits 2,161,496 2,281,337 1,432,205
Investment securities
available for sale 5,921,287 9,265,471 8,390,550
Investment securities held
to maturity (approximate fair
value of $155,107,698,
$150,075,210,and $115,470,092) 156,029,445 149,666,806 114,181,749
Loans, less allowance for loan
losses of $2,177,926,
$2,187,277, and $2,181,135 161,510,157 162,243,008 161,824,677
Premises and equipment 6,891,238 7,064,970 5,745,842
Accrued interest receivable 1,415,775 1,344,613 1,405,587
Computer software 322,209 265,961 283,303
Bank owned life insurance 4,214,806 4,054,035 -
Other assets 272,790 291,553 106,004
$393,332,982 $386,486,401 $369,242,946

Liabilities and Stockholders' Equity
Deposits
Noninterest-bearing $ 78,542,414 $ 75,601,460 $ 73,289,541
Interest-bearing 241,229,944 242,344,593 228,205,925
319,772,358 317,946,053 301,495,466
Securities sold under
agreements to repurchase 5,933,466 4,113,154 4,029,100
Pending purchases of investment
securities - - 2,990,830
Accrued interest payable 116,502 145,044 243,468
Note payable 162,161 181,087 198,912
Deferred income taxes 549,070 355,632 70,156
Other liabilities 101,857 109,399 199,728
326,635,414 322,850,369 309,227,660
Stockholders' equity
Common stock, par value $1 per
share; authorized 10,000,000
shares; issued and outstanding
3,208,478 shares at December 31,
2004, 3,227,966 shares at
December 31,2003,and 3,240,000
shares at December 31, 2002 3,208,478 3,227,966 3,240,000
Additional paid-in capital 16,187,005 16,869,085 17,290,000
Retained earnings 45,917,427 42,391,363 38,788,018
65,312,910 62,488,414 59,318,018
Accumulated other
comprehensive income 1,384,658 1,147,618 697,268
66,697,568 63,636,032 60,015,286
$393,332,982 $386,486,401 $369,242,946

The accompanying notes are an integral part of these financial statements.

2

Calvin B. Taylor Bankshares, Inc.
and Subsidiary
Consolidated Statements of Income

Years Ended December 31,
2004 2003 2002

Interest and dividend revenue
Loans, including fees $ 11,512,125 $ 12,115,447 $ 13,095,218
U. S. Treasury and government
agency securities 2,822,526 2,817,600 3,456,932
State and municipal securities 273,712 219,806 224,662
Federal funds sold 547,226 540,804 922,620
Interest-bearing deposit 47,574 42,363 41,661
Equity securities 48,592 43,227 37,792
Total interest and dividend
revenue 15,251,755 15,779,247 17,778,885

Interest expense
Deposit interest 1,535,171 2,110,465 3,996,749
Borrowings 18,723 21,493 40,848
Total interest expense 1,553,894 2,131,958 4,037,597
Net interest income 13,697,861 13,647,289 13,741,288

Provision for loan losses - - 25,000
Net interest income after
provision for loan losses 13,697,861 13,647,289 13,716,288

Noninterest revenue
Service charges on deposit
accounts 1,050,504 1,028,306 993,302
ATM and debit card revenue 322,716 275,974 252,755
Miscellaneous revenue 376,577 259,556 216,405
Gain on sale of real estate - - 267,844
Total noninterest revenue 1,749,797 1,563,836 1,730,306

Noninterest expenses
Salaries 3,136,220 3,092,919 2,994,325
Employee benefits 767,058 734,495 628,516
Occupancy 593,475 536,269 455,651
Furniture and equipment 551,721 542,433 578,779
Other operating 1,759,997 1,715,545 1,842,909
Total noninterst expenses 6,808,471 6,621,661 6,500,180

Income before income taxes 8,639,187 8,589,464 8,946,414

Income taxes 3,026,000 3,049,250 3,192,498

Net income $5,613,187 $5,540,214 $5,753,916

Earnings per common share $1.74 $1.71 $1.78

The accompanying notes are an integral part of these financial statements.

3

Calvin B. Taylor Bankshares, Inc.
and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity

Accumulated
other
Common stock Additional Retained comprehensive Comprehensive
Shares Par value Paid-in capitalearnings income income

Balance, December 31, 2001
3,240,000 3,240,000 17,290,000 36,274,102 438,468
Net income - - - 5,753,916 - $5,753,916
Unrealized gain on
investment securities
available for sale
net of income taxes - - - - 258,800 258,800
Comprehensive income $6,012,716
Cash dividend,
$1.00 per share - - - (3,240,000) -
Balance, December 31, 2002
3,240,000 3,240,000 17,290,000 38,788,018 697,268

Net income - - - 5,540,214 - $5,540,214
Unrealized gain on investment
securities available for sale
net of income taxes - - - - 450,350 450,350
Comprehensive income $5,990,564
Common shares repurchased
(12,034) (12,034) (420,915) - -
Cash dividend,
$.60 per share - - - (1,936,869) -

Balance, December 31, 2003
3,227,966 $ 3,227,966 $16,869,085 $42,391,363 $1,147,618
Net income - - - 5,613,187 - $5,613,187
Unrealized loss on
investment securities
available for sale
net of income taxes - - - - 237,040 237,040
Comprehensive income $5,850,227
Common shares repurchased
(19,488) (19,488) (682,080) - -
Cash dividend,
$.65 per share - - - (2,087,123) -
Balance, December 31, 2004
3,208,478 $ 3,208,478 $16,187,005 $45,917,427 $1,384,658

The accompanying notes are an integral part of these financial statements.

4

Calvin B. Taylor Bankshares, Inc.
and Subsidiary
Consolidated Statements of Cash Flows

Years Ended December 31,
2004 2003 2002

Cash flows from operating activities
Interest received $ 15,076,687 $ 15,761,248 $ 17,961,046
Fees and commissions received 1,640,852 1,507,872 1,462,551
Interest paid (1,582,435) (2,230,381) (4,323,477)
Cash paid to suppliers
and employees (6,149,693) (6,026,828) (5,909,413)
Income taxes paid (3,013,895) (3,232,338) (2,997,807)
5,971,516 5,779,573 6,192,900

Cash flows from investing activities
Certificates of deposits
purchased, net of maturities (567) (699,000) (553,205)
Proceeds from maturity of
investments available for sale 4,000,000 - -
Purchase of investments
available for sale (264,504) (182,500) (3,994,520)
Proceeds from maturities of
investments held to maturity 102,010,000 107,310,000 91,445,000
Purchase of investments held
to maturity (108,272,336) (145,709,919) (118,071,995)
Loans made, net of principal
collected 732,851 (418,331) 4,651,835
Proceeds from sale of premises
and equipment - - 503,160
Purchases of and deposits on
premises,equipment,and
computer software (551,236) (1,941,071) (650,339)
Purchase of bank owned
life insurance - (4,000,000) -
(2,345,792) (45,640,821) (26,670,064)

Cash flows from financing activities
Net increase (decrease) in
Time deposits (9,431,045) (1,459,208) (10,215,697)
Other deposits 11,257,350 17,909,795 37,561,982
Securities sold under
agreements to repurchase 1,820,312 84,054 (526,223)
Payments on note payable (18,926) (17,825) (16,791)
Common shares repurchased (701,568) (432,949) -
Dividends paid (2,087,123) (1,936,869) (3,240,000)
839,000 14,146,998 23,563,271

Net increase (decrease) in cash
and cash equivalents 4,464,724 (25,714,250) 3,086,107

Cash and cash equivalents
at beginning of year 50,158,779 75,873,029 72,786,922
Cash and cash equivalents
at end of year $54,623,503 $50,158,779 $75,873,029

The accompanying notes are an integral part of these financial statements.
5

Calvin B. Taylor Bankshares, Inc.
and Subsidiary
Consolidated Statements of Cash Flows
(Continued)

Years Ended December 31,
2004 2003 2002

Reconciliation of net income to net
cash provided by operating
activities
Net income $ 5,613,187 $ 5,540,214 $ 5,753,916

Adjustments to reconcile net
income to net cash provided
by operating activities
Depreciation and amortization 656,293 633,383 629,738
Provision for loan losses - - 25,000
Deferred income taxes 42,212 46,409 41,962
Amortization of premiums and
accretion of discounts, net (103,350) (78,972) (166,069)
(Gain) loss on disposition of
assets 12,427 5,902 (260,880)
Decrease (increase) in
Accrued interest receivable (71,162) 60,974 348,229
Cash surrender value of bank
owned life insurance (160,771) (54,035) -
Other assets 18,763 (185,549) (8,914)
Increase (decrease) in
Accrued interest payable (28,542) (98,424) (285,880)
Accrued income taxes (30,107) - 152,730
Other liabilities 22,566 (90,329) (36,932)
$ 5,971,516 $ 5,779,573 $ 6,192,900

Composition of cash and cash equivalents
Cash and due from banks $ 21,901,546 $ 20,482,866 $ 21,051,412
Federal funds sold 32,692,233 29,525,781 54,821,617
Interest-bearing deposits,
except for time deposits 29,724 150,132 -
$ 54,623,503 $ 50,158,779 $ 75,873,029

The accompanying notes are an integral part of these financial statements.
6

Calvin B. Taylor Bankshares, Inc.
and Subsidiary
Notes to Consolidated Financial Statements

1. Summary of Significant Accounting Policies

Calvin B. Taylor Bankshares, Inc. is a bank holding company. Its
subsidiary, Calvin B. Taylor Banking Company, is a financial institution
operating primarily in Worcester County, Maryland and Sussex County,
Delaware.
The accounting and reporting policies reflected in the
financial statements conform to generally accepted accounting principles
and to general practices within the banking industry. The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements.
These estimates and assumptions may affect the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
these estimates.

Principles of consolidation
The consolidated financial statements of Calvin B. Taylor Bankshares,
Inc. include the accounts of its wholly owned subsidiary, Calvin B. Taylor
Banking Company. All significant intercompany balances and transactions have
been eliminated in consolidation.

Cash equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks and federal funds sold and interest-
bearing deposits except for time deposits. Federal funds are purchased and
sold for one-day periods.

Investment securities
As securities are purchased, management determines if the securities
should be classified as held to maturity or available for sale. Securities
which management has the intent and ability to hold to maturity are recorded
at amortized cost which is cost adjusted for amortization of premiums and
accretion of discounts to maturity. Securities classified as available-for-
sale are recorded at fair value.
Gains and losses on disposal are determined using the specific-
identification method.

Loans and allowance for loan losses
Loans are stated at face value less the allowance for loan losses.
Interest on loans is credited to income based on the principal amounts
outstanding. The accrual of interest is discontinued when any portion of
the principal or interest is ninety days past due and collateral is
insufficient to discharge the debt in full.
The allowance for loan losses is maintained at a level deemed appropriate
by management to provide adequately for known and inherent risks in the loan
portfolio. The minimum range of the allowance for loan losses is calculated
by applying risk-weighted percentages to loans based on their delinquency
and underlying collateral. The portion of the allowance that is a result of
geographic and industry concentrations and current economic conditions is not
allocated to specific loans. At December 31, 2004, the allowance included
approximately $1,040,028 that was not allocated to specific loans.

7

Calvin B. Taylor Bankshares, Inc.
and Subsidiary
Notes to Consolidated Financial Statements

1. Summary of Significant Accounting Policies (Continued)

Loans and allowance for loan losses (continued)

If the current economy or real estate market were to suffer a severe
downturn, the estimate for uncollectible accounts would need to be increased.
Loans that are deemed to be uncollectible are charged off and deducted from
the allowance. The provision for loan losses and recoveries on loans
previously charged off are added to the allowance.
Loans are considered impaired when, based on current information,
management considers it unlikely that collection of principal and interest
payments will be made according to contractual terms. Generally, loans are
not reviewed for impairment until the accrual of interest has been discontinued.

Premises and equipment
Premises and equipment are recorded at cost less accumulated depreciation.
Depreciation is computed under both straight-line and accelerated methods
over the estimated useful lives of the assets.

Computer software
The Company amortizes software costs over their useful lives using the
straight-line method.

Bank owned life insurance
The Company records increases in cash surrender value of bank owned
life insurance as current period income based on projections provided by the
underwriting company.

Advertising
Advertising costs are expensed as incurred.

Income taxes
The provision for income taxes includes taxes payable for the current
year and deferred income taxes. Deferred income taxes are provided for the
temporary differences between financial and taxable income. Tax expense and
tax benefits are allocated to the banks and company based on their
proportional share of taxable income.

Per share data
Earnings per common share are determined by dividing net income by the
weighted average of shares outstanding for the period. The weighted average
of common shares outstanding was 3,219,116,3,235,767,and 3,240,000 shares
outstanding, for the years ended December 31, 2004, 2003, and 2002,
respectively.

2. Cash and Due From Banks

The Company normally carries balances with other banks that exceed the
federally insured limit. The average balances carried in excess of the
limit, including unsecured federal funds sold to the same banks, were
$42,076,235 for 2004,$53,869,724 for 2003,and $59,942,898 for 2002.
Banks are required to carry noninterest-bearing cash reserves at specified
percentages of deposit balances. The Company's normal amount of cash on hand
and on deposit with other banks is sufficient to satisfy the reserve
requirements.

8

Calvin B. Taylor Bankshares, Inc.
and Subsidiary
Notes to Consolidated Financial Statements

3. Investment Securities

Investment securities are summarized as follows:

Amortized Unrealized Unrealized Market
cost gains losses value

December 31, 2004
Available for sale
U.S. Treasury $ 1,994,909 $ 559,778 $ - $ 2,554,687
State and municipal 100,000 1,034 - 101,034
Equity 1,612,712 1,653,106 252 3,265,566
$ 3,707,621 $2,213,918 $ 252 $ 5,921,287

Held to maturity
U.S. Treasury $116,617,254 $ 3,267 $602,820 $116,017,701
U.S. Government agency 19,991,938 1,615 216,549 19,777,004
State and municipal 19,420,253 982 108,242 19,312,993
$156,029,445 $ 5,864 $927,611 $155,107,698

December 31, 2003
Available for sale
U.S. Treasury $ 5,991,862 $ 588,451 $ - $ 6,580,313
Equity 1,448,208 1,236,950 - 2,685,158
$ 7,440,070 $1,825,401 $ - $ 9,265,471
Held to maturity
U.S. Treasury $116,440,258 $ 416,411 $ 34,334 $116,822,335
U.S. Government agency 17,000,810 69,385 60,879 17,009,316
State and municipal 16,225,738 34,016 16,195 16,243,559
$149,666,806 $ 519,812 $111,408 $150,075,210

December 31, 2002
Available for sale
U.S. Treasury $ 5,988,858 $ 618,012 $ - $ 6,606,870
Equity 1,265,708 552,416 34,444 1,783,680
$ 7,254,566 $1,170,428 $ 34,444 $ 8,390,550
Held to maturity
U.S. Treasury $ 86,065,325 $ 992,655 $ - $ 87,057,980
U.S. Government agency 19,902,908 211,063 - 20,113,971
State and municipal 8,213,516 85,275 650 8,298,141
$114,181,749 $1,288,993 $ 650 $115,470,092

9

Calvin B. Taylor Bankshares, Inc.
and Subsidiary
Notes to Consolidated Financial Statements

3. Investment Securities (Continued)

The table below shows the gross unrealized losses and fair value of
securities that are in an unrealized loss position as of December 31, 2004,
aggregated by length of time the individual securities have been in a
continous unrealized loss position.

Less than 12 months 12 monthes or more Total
Fair Unrealized Fair Unrealized Fair Unrealized
Value Loss Value Loss Value Loss

U. S. Treasury $106,788,806 $ 591,710 $ 1,990,313 $ 11,110 $ 108,779,119 $ 602,820
U. S. Government
Agency 17,290,458 201,480 984,931 15,069 18,275,389 216,549
State and municipal 17,974,368 105,227 197,840 3,015 18,172,208 108,242
Equity 19,344 252 - - 19,344 242
$142,072,976 $ 898,669 $ 3,173,084 $ 29,194 $ 145,246,060 $ 927,863

The debt securities for which an unrealized loss is recorded are issues
of the United States Treasury, Federal Home Loan Bank(a U.S. government agency),
and general obligations of states and municipalities. These securitites are
classified as held-to maturity because the Company has the ability and the
intent to hold the securitites until they are called or mature at face value.
Fluctuatuions in fair value are reflective of market conditions, and not
indicative of an other than temporary impairment of the investment.
The equity security for which an unrealized loss is recorded was purchased
during 2004 as a long-term investment. This short-term value fluctuation
is not indicative of an other than temporary impairment of the investment.

The amortized cost and estimated market value of debt securities,
by contractual maturity and the amount of pledged securities, follow. Actual
maturities may differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.

December 31, 2004 December 31, 2003 December 31, 2002
Amortized Fair Amortized Fair Amortized Fair
cost value cost value cost value

Available for sale
Within one year $ - $ - $3,997,243 $4,021,251 $ - $ -
After one year
through five years 100,000 101,034 - - 3,994,528 4,003,750
After ten years 1,994,909 2,554,687 1,994,619 2,559,062 1,994,330 2,603,120
$2,094,909 $2,655,721 5,991,862 $6,580,313 $5,988,858 $6,606,870

Held to maturity due
Within one year $72,905,414 $72,619,263 $72,871,344 $73,184,592 $55,013,475 $55,394,968
After one year
through five years 83,124,031 82,488,435 76,795,462 76,890,618 59,168,274 60,075,124
$156,029,445 $155,107,698 $149,666,806 $150,075,210 $114,181,749 $115,470,092

Pledged securities
$27,289,502 $27,610,734 $21,790,367 $21,870,641 $20,868,000 $21,248,011

Investments are pledged to secure deposits of federal and local
governments. Pledged securities also serve as collateral for securities
sold under agreements to repurchase.

10

Calvin B. Taylor Bankshares, Inc.
and Subsidiary
Notes to Consolidated Financial Statements

4. Lines of Credit

The Company has available lines of credit, including overnight federal
funds, reverse repurchase agreements and letters of credit, totaling
$19,000,000 as of December 31,2004, 2003, and 2002.

5. Loans and Allowance for Loan losses

Major classifications of loans are as follows:

2004 2003 2002

Commercial $ 14,007,430 $ 13,199,879 $ 12,765,723
Real estate 141,029,581 134,492,195 139,354,241
Construction 6,640,665 14,107,588 8,447,354
Consumer 2,010,407 2,630,623 3,438,494
163,688,083 164,430,285 164,005,812
Allowance for loan losses 2,177,926 2,187,277 2,181,135
Loans, net $161,510,157 $162,243,008 $161,824,677

The rate repricing distribution of the loan portfolio follows:

Immediately $159,522,150 $160,730,764 $160,567,318
Within one year 1,240,935 1,405,338 813,678
Over one to five years 2,107,774 2,031,134 2,197,969
Over five years 817,224 263,049 426,847
$163,688,083 $164,430,285 $164,005,812

Outstanding loan commitments, lines of credit, and letters of credit
are as follows:

Loan commitments and lines
of credit
Construction and land
development $ 7,294,592 $ 10,495,735 $ 10,557,644
Other 21,276,025 15,036,346 11,876,437
$ 28,570,617 $ 25,532,081 $ 22,434,081

Standby letters of credit $ 1,535,210 $ 2,957,508 $ 1,726,127

Loan commitments are agreements to lend to customers as long as there
is no violation of any conditions of the contracts. Loan commitments
generally have interest at current market rates, fixed expiration dates,
and may require payment of a fee.

Letters of credit are commitments issued to guarantee the performance of
a customer to a third party.

11

Calvin B. Taylor Bankshares, Inc.
and Subsidiary
Notes to Consolidated Financial Statements

5. Loans and Allowance for Loan losses (Continued)

Loan commitments and letters of credit are made on the same terms,
including collateral, as outstanding loans. The Company's exposure to loan
loss in the event of nonperformance by the borrower is represented by the
contract amount of the commitment.

The Company makes loans to customers located primarily in the Delmarva
region. Although the loan portfolio is diversified, its performance will be
influenced by the economy of the region.

Transactions in the allowance for loan losses were as follows:

2004 2003 2002

Beginning balance $ 2,187,277 $ 2,181,135 $ 2,195,922
Provision charged to operations - - 25,000
Recoveries 4,523 9,565 8,983
2,191,800 2,190,700 2,229,905
Loans charged off 13,874 3,423 48,770
Ending balance $ 2,177,926 $ 2,187,277 $ 2,181,135

Amounts past due 90 days or more, and still accruing interest,
are as follows:

Commercial $ 151,063 $ 55,795 $ 17,370
Real estate 200,278 251,658 250,206
Consumer 40,335 7,942 15,280
$ 391,676 $ 315,395 $ 282,856

Management has identified no impaired loans at December 31, 2004,
2003, and 2002. There were no non-accruning loans at December 31,2004
or December 13, 2003. Accrual of interest had been discontinued on one loan
with a balance of $2,222 at December 31, 2002.

6. Lease Commitments

The Company leases the land on which the Route 50 branch in East
Berlin is located. The lease obligation, which expires August 31,
2009, requires payments as follows:

Minimum
Period rentals

2005 15,000
2006 15,000
2007 15,000
2008 15,000
2009 10,000
$ 70,000

12

Calvin B. Taylor Bankshares, Inc.
and Subsidiary
Notes to Consolidated Financial Statements

7. Premises and Equipment

A summary of premises and equipment and the related depreciation
is as follows:

Estimated
useful life 2004 2003 2002

Land $ 2,076,097 $ 1,893,946 $ 1,659,793
Premises 5 - 50 years 6,400,025 6,423,636 5,028,225
Furniture and equipment 5 - 40 years 3,473,775 3,446,813 3,326,082
Construction in progress - - 210,583
11,949,897 11,764,395 10,224,683
Accumulated depreciation 5,058,659 4,699,425 4,478,841
Net premises and equipment $ 6,891,238 $ 7,064,970 $ 5,745,842

Depreciation expense $ 539,102 $ 541,647 $ 514,285

8. Deposits

Major classifications of interest-bearing deposits are as follows:

2004 2003 2002

Money market $ 49,362,532 $ 50,168,501 $ 46,942,638
Savings and NOW 122,559,288 114,896,131 102,524,118
Other time 69,308,124 77,279,961 78,739,169
$241,229,944 $242,344,593 $228,205,925

The rate repricing distribution of other time deposits follows:

Three months or less $ 22,567,632 $ 26,832,009 $ 28,235,099
Over three through twelve months 34,055,564 35,832,764 36,006,763
Over one through two years 12,684,928 14,615,188 14,497,307
$ 69,308,124 $ 77,279,961 $ 78,739,169

Included in other time deposits are certificates of deposit of
$100,000 or more as follows:

Amount outstanding $ 18,624,257 $ 20,037,763 $ 15,842,086
Interest expense $ 276,074 $ 324,822 $ 597,603

13

Calvin B. Taylor Bankshares, Inc.
and Subsidiary
Notes to Consolidated Financial Statements

9. Securities Sold Under Agreements to Repurchase

Securities sold under agreements to repurchase represent overnight
borrowings from customers. The government agency securities that
collateralize these agreements are owned by the Company but maintained in
the custody of an unaffiliated bank designated by the Company. Additional
information follows.

2004 2003 2002

Maximum month-end amount outstanding$ 7,617,275 $ 6,542,540 $ 6,531,215
Average amount outstanding 5,020,787 4,134,892 4,954,682
Average rate paid during the year .17% .24% .57%
Investment securities underlying the
agreements at year end
Carrying value 21,991,519 16,993,472 15,994,905
Estimated fair value 21,838,750 17,050,781 16,306,570

10. Note Payable

The Company purchased real estate, financing 100% of the purchase
price. The 6% unsecured note has a final maturity of September, 2011.
Maturities of this note are as follows:

2005 20,092
2006 21,332
2007 22,647
2008 24,044
2009 25,527
Remaining years 48,519
$162,161

11. Profit Sharing Plan

In 1999, the Company adopted a defined contribution profit sharing
plan under Section 401(k) of the Internal Revenue Code. The plan covers
substantially all of the employees and allows discretionary Company
contributions. Annually, the Board of Directors approves a discretionary
contribution in addition to matching 50% of employee contributions to a
maximum of 6% of the employee wages.

The total cost of the profit sharing plan for 2004,2003,and 2002,
were $149,171, $170,395, and $146,568, respectively.

14

Calvin B. Taylor Bankshares, Inc.
and Subsidiary
Notes to Consolidated Financial Statements

12. Non-interest Expenses

The components of non-interest other operating expenses follow:

2004 2003 2002

Advertising $ 145,583 $ 152,358 $ 154,382
ATM and debit card 232,353 201,354 194,536
Business and product development 70,720 66,480 64,448
Computer software amortization 117,191 91,736 115,453
Computer software maintenance contracts 82,514 97,570 91,141
Courier service 103,922 93,457 96,120
Deposit insurance 45,403 46,975 47,800
Director fees 89,375 84,240 80,600
Dues, donations, and subscriptions 81,328 80,842 81,171
Freight 60,829 67,517 62,294
Liability insurance 41,556 47,160 60,042
Postage 169,569 168,083 181,567
Professional fees 22,745 37,551 72,399
Stationery and supplies 135,269 125,593 158,965
Telephone 123,012 117,602 130,172
Miscellaneous 238,628 237,027 251,819
$1,759,997 $1,715,545 $1,842,909

13. Related Party Transactions

The executive officers and directors of the Company enter into
loan transactions with the Banks in the ordinary course of business.
The terms of these transactions are similar to the terms provided to
other borrowers entering into similar loan transactions.
Executive officers and directors make deposits in the Bank,
and invest in uninsured non-deposit investment products. They receive
the same rates and terms on insured deposit accounts and securities
sold under agreements to repurchase as other customers with simialar accounts

2004 2003 2002

Beginning balance $ 9,156,940 $ 11,133,959 $ 11,079,167
Advances 9,146,486 8,550,318 6,034,153
18,303,426 19,684,277 17,113,320
Repayments 12,096,074 10,527,337 5,884,153
Other decreases 100 - 95,208
Ending balance $ 6,207,252 $ 9,156,940 $ 11,133,959

Deposit and non-deposit
investment balances $ 13,833,657 $ 9,466,866 $ 8,041,253

The Company obtains legal services from a law firm in which one of the
principal attorneys is also a member of the Board of Directors. Fees charged
for these services are at similar rates charged by unrelated law firms for
similar legal work. There were no payments to this related party during 2004.
Amounts paid to this related party totaled $3,490, and $1,235,during the years
ended December 31, 2003, and 2002.

15

Calvin B. Taylor Bankshares, Inc.
and Subsidiary
Notes to Consolidated Financial Statements

14. Income Taxes

The components of income tax expense are as follows:

2004 2003 2002

Current
Federal $2,597,535 $2,613,587 $2,772,796
State 386,253 389,254 377,740
2,983,788 3,002,841 3,150,536
Deferred 42,212 46,409 41,962
$3,026,000 $3,049,250 $3,192,498

The components of the deferred tax are as follows:

Provision for loan losses $ 5,820 $ (2372) $ 2,656
Non-accrual loan interest - 43 (43)
Depreciation 30,862 47,512 32,334
Discount accretion 5,367 (128) 3,191
Net operating loss carryforward
for state income tax 163 (163) -
Organization costs - 1,517 3,824
$ 42,212 $ 46,409 $ 41,962

The components of the net deferred tax liability are as follows:

Deferred tax asset
Allowance for loan losses $ 597,675 $ 603,495 $ 601,123
Non-accrual loan interest - - 43
Net operating loss
carryforward for state
income tax 163 -
Organization costs - - 1,517
597,675 603,658 602,683

Deferred tax liabilities
Depreciation 298,974 268,112 220,601
Discount accretion 18,762 13,395 13,523
Unrealized gain on securities
available for sale 829,009 677,783 438,715
1,146,745 959,290 672,839

Net deferred tax liability $ (549,070) $ (355,632) $ (70,156)

A reconciliation of the provision for taxes on income from the
statutory federal income tax rates to the effective income tax rates follows:

Statutory federal income tax rate 34.0 % 34.0 % 34.0 %
Increase (decrease) in tax rate
resulting from
Tax-exempt income (2.0) (1.5) (1.1)
State income taxes net of federal
income tax benefit 3.0 3.0 2.8
35.0 % 35.5 % 35.7 %

16

Calvin B. Taylor Bankshares, Inc.
and Subsidiary
Notes to Consolidated Financial Statements

15. Fair Value of Financial Instruments

The estimated fair values of the Company's financial instruments are
summarized below. The fair values of a significant portion of these
financial instruments are estimates derived using present value techniques
prescribed by the Financial Accounting Standards Board and may not be
indicative of the net realizable or liquidation values. The calculation of
estimated fair values is based on market conditions at a specific point in
time and may not reflect current or future fair values.

December 31, 2004 December 31, 2003 December 31, 2002
Carrying Fair Carrying Fair Carrying Fair
amount value amount value amount value

Financial assets
Cash and due from
banks $21,901,546 $22,074,622 $20,482,866 $20,632,954 $21,051,412 $21,163,525
Interest-bearing
deposits 2,161,496 2,163,186 2,281,337 2,305,344 1,432,205 1,469,452
Investment
securities 161,950,732 161,028,985 158,932,277 159,340,681 122,572,299 123,860,642
Loans, net 161,510,157 161,534,247 162,243,008 162,289,522 161,824,677 161,892,242
Financial
liabilities
Interest-bearing
deposits $241,229,944 $241,284,245 $242,344,593 $242,471,838 $228,205,925 $228,558,735
Note payable 162,161 158,414 181,087 176,288 198,912 193,045

The fair value of federal funds sold, noninterest-bearing deposits, and
securities sold under agreements to repurchase equals their carrying value.

The fair value of silver coin included with cash is determined based
on quoted market prices.

The fair value of interest-bearing deposits with other financial
institutions is estimated based on quoted interest rates for
certificates of deposit with similar remaining terms.

The fair values of equity securities are determined using market
quotations. The fair values of debt securities are estimated using a
matrix that considers yield to maturity, credit quality, and
marketability.

The fair value of fixed-rate loans is estimated to be the present
value of scheduled payments discounted using interest rates currently
in effect for loans of the same class and term. The fair value of
variable-rate loans, including loans with a demand feature, is
estimated to equal the carrying amount. The valuation of loans is
adjusted for possible loan losses.

The fair value of interest-bearing checking, savings, and money
market deposit accounts is equal to the carrying amount. The fair
value of fixed-rate time deposits is estimated based on interest
rates currently offered for deposits of similar remaining maturities.

It is not practicable to estimate the fair value of outstanding
loan commitments, unused lines, and letters of credit.

17

Calvin B. Taylor Bankshares, Inc.
and Subsidiary
Notes to Consolidated Financial Statements

16. Capital Standards

The Federal Reserve Board and the Federal Deposit Insurance
Corporation have adopted risk-based capital standards for banking
organizations. These standards require ratios of capital to assets
for minimum capital adequacy and to be classified as well
capitalized under prompt corrective action provisions. The capital
ratios and minimum capital requirements of the Company are as
follows:

Minimum To be well
(in thousands) Actual capital adequacy capitalized
Amount Ratio Amount Ratio Amount Ratio

December 31, 2004
Total risk-based capital
(to risk weighted assets) $67,862 43.3% $12,526 8.0% $15,657 10.0%
Tier 1 capital
(to risk-weighted assets) $65,313 41.7% $ 6,263 4.0% $ 9,394 6.0%
Tier 1 capital
(to average fourth quarter
assets) $65,313 16.0% $16,307 4.0% $20,384 5.0%

December 31, 2003
Total risk-based capital
(to risk weighted assets) $65,082 39.1% $13,299 8.0% $16,624 10.0%
Tier 1 capital
(to risk-weighted assets) $62,488 37.6% $ 6,650 4.0% $ 9,974 6.0%
Tier 1 capital
(to average fourth quarter
assets) $62,488 16.0% $15,636 4.0% $19,545 5.0%

December 31, 2002
Total risk-based capital
(to risk weighted assets) $61,255 40.7% $12,032 8.0% $15,040 10.0%
Tier 1 capital
(to risk-weighted assets) $59,318 39.4% $ 6,016 4.0% $ 9,024 6.0%
Tier 1 capital
(to average fourth quarter
assets) $59,318 15.9% $14,902 4.0% $18,628 5.0%

Tier 1 capital consists of common stock, additional paid in
capital, and retained earnings. Total risk-based capital includes a
limited amount of the allowance for loan losses. In calculating
risk-weighted assets, specific risk percentages are applied to each
category of asset and off-balance sheet items.

Failure to meet the capital requirements could affect the
Company's ability to pay dividends and accept deposits, and may
significantly affect the operations of the Company.

In the most recent regulatory report, the Company was determined
to be well capitalized. Management has no plans that should change
the classification of the capital adequacy.

18

Calvin B. Taylor Bankshares, Inc.
and Subsidiary
Notes to Consolidated Financial Statements

17. Parent Company Financial Information

December 31,
Balance Sheets 2004 2003 2002
Assets

Cash and due from banks $ 10,651 $ 52,244 $ 353,604
Interest-bearing deposits 530,291 650,132 -
Investment securities available for sale 3,265,566 2,685,158 1,783,680
Investment securities held to maturity 503,156 499,692 499,230
Investment in subsidiary bank 61,630,473 58,798,328 56,226,822
Premises and equipment 1,311,740 1,342,696 1,375,315
Other assets 77,742 163,001 3,630
Total assets $ 67,329,619 $ 64,191,251 $ 60,242,281

Liabilities and Stockholders' Equity

Liabilities
Deferred income taxes $ 552,841 $ 393,950 $ 118,136
Other liabilities 79,210 161,269 108,859
632,051 555,219 226,995
Stockholders' equity
Common stock 3,208,478 3,227,966 3,240,000
Additional paid-in capital 16,187,005 16,869,085 17,290,000
Retained earnings 45,917,427 42,391,363 38,788,018
Accumulated other comprehensive income 1,384,658 1,147,618 697,268
Total stockholders' equity 66,697,568 63,636,032 60,015,286
Total liabilities and stockholders' equity
$ 67,329,619 $ 64,191,251 $ 60,242,281

Years Ended December 31,
Statements of Income 2004 2003 2002

Interest revenue $ 19,480 $ 12,678 $ 37,066
Dividend revenue 48,676 43,227 37,792
Dividends from subsidiary 2,721,640 2,936,869 1,944,000
Equity in undistributed income
of subsidiary 2,850,387 2,562,464 3,612,515
Gain on sale of real estate - - 267,844
Rental income and other fees - 2,028 2,748
5,640,183 5,557,266 5,901,965

Expenses
Occupancy 3,251 3,777 15,831
Furniture and equipment 1,167 2,014
Other 22,745 20,272 21,263
25,996 25,216 39,108
Income before income taxes 5,614,187 5,532,050 5,862,857
Income taxes (benefit) 1,000 (8,164) 108,941
Net income $ 5,613,187 $ 5,540,214 $ 5,753,916

19

Calvin B. Taylor Bankshares, Inc.
and Subsidiary
Notes to Consolidated Financial Statements

17. Parent Company Financial Information (Continued)

Years Ended December 31,
2004 2003 2002

Statements of Cash Flows
Cash flows from operating activities
Interest and dividends received $ 2,789,328 $ 2,992,141 $ 2,012,520
Rental payments and fees received 33,600 35,629 24,348
Cash paid for operating expenses (28,639) (26,197) (27,234)
Income taxes refunded (paid) 1,310 (100,483) 1,727
2,795,599 2,901,090 2,011,361

Cash flows from investing activities
Certificates of deposit purchased,
net of maturities (564) (500,000) 1,500,000
Purchase of investments available
for sale (164,504) (182,500) -
Proceeds from maturities of investments
held to maturity 500,000 - 1,500,000
Purchase of investments held
to maturity (503,842) - (1,987,395)
Proceeds from sale of premises
and equipment - - 500,000
(168,910) (682,500) 1,512,605

Cash flows from financing activities
Common shares repurchases (701,568) (432,949) -
Dividends paid (2,087,123) (1,936,869) (3,240,000)
Net increase (decrease) in cash (162,002) (151,228) 283,966

Cash at beginning of year 202,376 353,604 69,638
Cash at end of year $ 40,374 $ 202,376 $ 353,604

Reconciliation of net income to net cash
provided by operating activities
Net income $ 5,613,187 $ 5,540,214 $ 5,753,916
Adjustments to reconcile net income
to net cash used in operating
activities
Undistributed net income of
subsidiary (2,850,387) (2,562,464) (3,612,515)
Amortization of premiums and
accretion of discount 21 (462) (11,835)
Depreciation 30,957 32,619 33,475
Gain on sale of real estate - - (267,844)
Decrease (increase) in other assets 85,259 (159,371) 52,058
Increase (decrease) in deferred
income taxes and other liabilities (83,438) 50,554 64,106
$ 2,795,599 $ 2,901,090 $ 2,011,361

20

Calvin B. Taylor Bankshares, Inc.
and Subsidiary
Notes to Consolidated Financial Statements

18. Quarterly Results of Operations (Unaudited)

Three months ended
December 31, September 30, June 30, March 31,

2004
Interest revenue $3,954,857 $3,820,243 $3,733,533 $3,743,122
Interest expense 384,375 382,761 384,221 402,537
Net interest income 3,570,482 3,437,482 3,349,312 3,340,585
Provision for loan losses - - - -
Net income 1,451,346 1,447,964 1,371,093 1,342,784
Comprehensive income 1,564,420 1,663,271 1,235,704 1,386,832
Earnings per share $0.45 $0.45 $0.43 $0.42

2003
Interest revenue $3,826,749 $3,934,534 $4,024,543 $3,993,421
Interest expense 435,526 473,779 559,096 663,557
Net interest income 3,391,223 3,460,755 3,465,447 3,329,864
Provision for loan losses - - - -
Net income 1,308,544 1,429,125 1,450,040 1,352,505
Comprehensive income 1,372,451 1,288,388 1,994,551 1,335,174
Earnings per share $0.40 $0.44 $0.45 $0.42

2002
Interest revenue $4,227,559 $4,553,255 $4,555,972 $4,442,099
Interest expense 835,131 995,620 1,036,065 1,170,781
Net interest income 3,392,428 3,557,635 3,519,907 3,271,318
Provision for loan losses 25,000 - - -
Net income 1,441,829 1,491,997 1,540,177 1,279,913
Comprehensive income 1,500,543 1,658,031 1,608,412 1,245,730
Earnings per share $0.45 $0.46 $0.47 $0.40

21